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Weekly UpdatesApart from defaults in the middle of construction, the presale properties in China also suffer from poor built quality. The poor quality derived not only from substandard building materials but also decoration mismatches with what had been promised in the presale promotions (Yang, 2001). Similar problems were also found in other countries like Singapore, Taiwan, Canada and the U.K. (Ong, 1997; Li, 1998; Cullum, 2005). In Taiwan, most housing complaints came from presale deals which accounted for 65% of the total housing complaints (Hua et al., 2001; Li, 1998). The three main types of complaints included poor quality building work (30.6%), shrinkage of housing space (11.9%) and incorrect housing information (21.2%). These problems are also common in western countries like the U.S. and U.K. and, therefore, Braxtan (2006) reminded potential buyers to include the inspection contingency clause in the presale contracts.
In the U.K., a building missive was published by a Glasgow solicitor in 1986 to expose the problems contained in presales of uncompleted properties (SCC, 2006), quoted:
"I hereby offer to purchase from you whatever type of house in whatever location and using whatever standard and specification of materials you see fit and I undertake to pay over the full purchase price within twenty-four hours of you intimating to me that the house is ready whether it is, in fact, ready or not and whether or not it has been passed as completed by the Local Authority....".
Notwithstanding how ironic the above missive sounded, according to the findings of the Baker Review in 2004 and the report prepared by the National Consumer Council (NCC) (Cullum, 2005), not much has been changed and there has been a lack of adequate consumer protection in buying presale properties in the U.K. The forward property contracts used are often unclear and included wide-ranging exclusions of liability. The problems include late completion of project, pressure on buyers to accept incomplete properties; late after-build service and inadequate means of redress. More important, the issue of snagging, resulted from the disparity between the actual and the expected specifications on the fittings and finishes, is seen to be a major problem. Attempts have been made by The Law Society to propose a standard Builders' Missive with the aim at "bringing the standards of all up to the level of the few and promoting a fairer, more even-handed standard missive in the industry". However, according to the report prepared by the Scottish Consumer Council (SCC) in 2006, little progress had been noted.
Unscrupulous sales tactics in conducting presales in some areas also cause concerns. Surveys conducted in Hong Kong revealed that developers used grey areas for not adhering to the requirements stipulated in the presale guidelines. For example, presales were conducted through the so-called "reserved unit registration" in which no price list was provided to allow buyers to compare prices of different flats. There were all sorts of confusing pretexts to promote sales, such as 'priority sales' and 'tied-sales', 'handshaking price' and 'sincerity price', etc. (Lai, 2006). Some developers had selectively released the transaction information in order to ramp up prices by creating an impression that the market was in dire demand (HKSAR, 2005; Apple Daily, 2006). Similar problems through so-called "soft launch", i.e. presales of uncompleted properties by invitation, were also found in Singapore. Previously, only 30% of a new development in Singapore could be sold through soft launches. However, following the heated market since 1996, some developers had sold all their flats through soft launch on the quiet, without going public (Sim, 2006). Furthermore, Gwin and Ong (2000) found that builders in Singapore might have minimized costs by putting "less than efficient effort" in constructing pre-sold properties. As a result, more building defects were found upon completion of these houses.
Table 1 categorised the presale problems commonly found and showed a comparison of the presale payment methods used in different countries. Some interesting insights can be drawn in regard to the operation of the different presale mechanisms.
As shown in Table 1, most countries, like the U.S., U.K. and Malaysia, adopt 10(5)/90(95) system in parallel with progress payment method for pre-selling uncompleted properties. Despite the use of 10(5)/90(95) payment method, defaults are still found in these areas. Furthermore, in Canada, U.S. and U.K., a number of potential projects were forced to cease even before their start when the developers were not able to secure the presale threshold, and the deposits had to be returned to the presale buyers. Whereas in places like Singapore and Hong Kong in which full settlement of the payment at the time of purchase is common, the default rate was close to zero for the last two decades. It poses the question on whether the use of a more prudent payment method like 10(5)/90(95) system can really enhance the efficiency of forward property markets, or whether there are other factors to dictate.
In regard to the other presale problems, they can be found in all places to some extent no matter which payment method is adopted. For example, many delays of completion were due to disputes between the developers and the government/contractors in fulfilling their responsibilities rather than force majeure reasons. Mismatches of fittings and finishes were often found in the completed properties because the quality and the decoration had been overstated in the presale brochures. The method for measuring the net usable floor area had not been specified in presales that the actual internal floor size of the flats turned out to be much smaller than what the buyers had expected, so-called "shrunk flat". Despite the problems found, forward property markets are still in place and works particularly active in certain areas like Hong Kong, Singapore and China. As such, what are the factors at force behind in activating the forward property presale mechanisms?
According to Gardner (2003), investment decisions are analogue to a game in which players are placed in a rule-governed situation with defined outcomes, characterized by strategic interdependence between the game players. The importance of information available to the players in a game makes a big difference to its outcomes. If the information is biased to some players, then the game would be unfair to those who do not possess the information. To correct the imperfect information problem in the games played in forward property markets where information is asymmetric, different means have been introduced by governmental sectors to clean up the markets in an attempt to deter the mal-practices of developers (Holmstrom, 1979; Ong, 1999). The forward property market in Hong Kong started since the Fifties and, to a certain extent, has managed to play a significant role in the economy for the past five decades. To facilitate a smooth operation, the Hong Kong government has initiated rules and regulations to deter the presale problems and to make the game played at a level-playing field for all players. As such, by referencing the development of the forward property market in Hong Kong, an attempt is made to explore the set of factors which are critical to the development of a forward property market.
3. THE HONG KONG FORWARD PROPERTY MARKET
The demand for residential property in Hong Kong has always been high despite the up-and-down cyclical movements in between years. Property prices shot up by seven folds from 1986 to the Asian Financial Crisis in 1997 (Hui and Lui, 2002). To cope with the surging demand for property with limited land supply, developers have concentrated on constructing high-rise buildings and large-scale housing estates. They adopt "production-based" strategies focusing on timing and maximizing quantity of property developments rather than on quality of production (Tang and Liu, 2001). With regard to financing for huge investments, developers have increasingly secured a substantial amount of upfront capital through the use of forward contracts to pre-sell uncompleted properties.
As shown in Table 2, the presales of uncompleted properties accounts for a large proportion of the Agreement for Sale and Purchase (ASP) transacted in the first-hand market from 1993 to 2005, ranging from 25% to as high as 78%. Figure 2 shows the number of properties pre-sold compared to the property price index in the territory from 1993 to 2005. It can be seen that the number of ASPs transacted in the forward market was trending along the property price index in general, the higher the property prices, the higher demand for presales.
[FIGURE 2 OMITTED]
3.1. Consent scheme and the three-pronged approach
The formal presales of uncompleted residential properties in Hong Kong was first recorded in 1954 covering a housing estate of over a hundred blocks of 3-floor buildings. It also signaled the start of co-ownership of multi-storey properties and, for the first time, allowed buyers to pay by installment on a purchase of property. However, in the early 1960s, a number of developers collapsed because of cashflow problems, this had deterred the interest of potential buyers in purchasing presale properties. As a result of the Peony House fiasco in 1960 of which the buyers had to pay an excess of 30% over the original purchase price in order to complete the construction after the developer fled, the government in 1961 made a review on the conveyancing practice in the forward property market and the Consent Scheme was introduced to guide the presales for protecting the buyers. The Consent Scheme (4) is implemented through the use of restrictions placed on the developers under the government lease, of which the developers must meet in order to obtain the consent of the Director of Lands for presales of the uncompleted properties (CM, 1999, 2001a, 2001b, 2002a, 2002b, 2002c; LC Paper, 2000a, 2000b, 2000c, 2002, 2003, 2004, 2006).
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