Regulating Information Asymmetry in the Residential Real Estate Market

The Hong Kong Experience

Devin Lin

• Publisher: CRC Press
• Year: 2017
• eBook ISBN: 9781315315386
• Edition: 1
• Topic: Business
• Subtopic: Real Estate
• Index: Business

This book conducts a detailed examination of the current form of the Hong Kong residential property regulatory system: the 2013 Residential Properties (Firsthand Sales) Ordinance (Cap 621). The author sheds light on how the new legislation promotes a number of values including information symmetry, consumer protection, the free market and business efficacy. It provides a detailed account of how the regulatory mechanism has evolved over the past three decades to catch unconsscionable sales tactics (such as selective information and/or misrepresentation of location, size, completion date and past transactions) and monitor sales practices in order to protect the interests of stakeholders in this ever-changing first-hand residential property market.

This book breaks down this complicated subject matter by focusing a number of chapters each on a specific attribute of the residential property on sale. It then examines the various channels through which the information is communicated to the prospective buyer and discusses misrepresentation of the key information in sales of residential properties as criminal liability.The tension between consumer's rights on one hand and the pursuit of free market principles on the other is but one example of the conflicting values thoroughly discussed in the book, others include superstition vs. modernization and clarity vs. flexibility.

Aimed at those with an interest in consumer protection and transparency-orientated legislation in commercialized real estate transactions, this book seeks to provide an in-depth discussion of the latest trends and directions of travel.

1 Introduction

The ground-breaking Hong Kong approach

Consumer protection is a fascinating subject that has remained on the fringe of property law and construction law for too long. With the fast development in the private real estate market worldwide in recent years, these two seemingly remote disciplines start to interact with each other. Malcolm Merry (2008) recorded the very beginning of an emerging awareness among flat purchasers of their status as consumers in the 1980s when property became big business in Hong Kong and the corresponding request for government control to promote fair practice in the sale and purchase of flats as follows:

They became more discriminating and realized that as customers they had a choice and as consumers they had, or ought to have, rights. It was no longer enough for the government just to make sure that the flats were built. Buyers expected to be protected from the sharp practices of developers and their agents.

This phenomenon suggests the connection point between consumer protection law and property law may be administrative or legislative regulation for protection of consumer rights in the transaction of properties, perhaps in particular first-hand residential properties, which aims to provide purchaser-consumers with access to relevant and important information regarding the residential property on sale. In the absence of mandatory regulation, much of this information can be hidden by the vendor, who may not otherwise be obliged to disclose important details under the common law doctrine caveat emptor.

On the other hand, government control is a much-discussed topic for property law and construction law. The degree of government control in regulating sales of commercial properties is a subject of much debate in different jurisdictions. The central goal of government regulation in respect of property transaction – in Hong Kong and elsewhere – is to promote a market that is efficient and transparent for consumers. A couple of years ago, it was considered that there was a serious lack of comprehensive and effective laws and regulations in the sale of residential flats in Hong Kong; it was then suggested that an appropriate regulatory system in the sector must balance market efficiency, consumer protection and developers’ interests (Goo 2010). Merry (2008) expressed a similar view when he concluded that the government regulation then ‘is generally effective to ensure that the flats are built and delivered to purchasers and that adequate arrangements are made for the management and administration of the building thereafter but that it is deficient in promoting fair practice in the sale and purchase of the flats on sale’.

As a general principle, government regulation in the property market should be balanced between two values: firstly, the value of a transparent, efficient market where both the vendor and the purchaser are equally able to access key information regarding the property on sale; and secondly, the interests of the free market, where the details of the transaction should mainly be subject to the contract agreed and entered into freely by the vendor and the purchaser. At the same time, the vendor shall enjoy certain rights as the owner of the property, i.e. the freedom to dispose of her property and the freedom not to sell.

In any jurisdiction where the value of the property is subject to market evaluation, the amount of money involved in the sale of any residential property tends to be significant for an ordinary purchaser. The damage the purchaser will suffer if the development is not completed, is delayed in its completion, is defective or is of a smaller size than promised, or if the vendor is not a qualified vendor of the property (i.e., with a defective title, without the qualification to sell at all, or without the qualification to sell before completion of construction), will be too great to recover in a short period of time. Some observers argue that the non-equal footing bargaining power between purchasers and developers further manifests the need of government to protect the interests of the general public in first-hand property sales (Chan et al. 2015). Indeed, it is both the unequal position between the vendor and the purchaser and the risk the purchaser is taking in entering into the agreement for sale and purchase that require the intervention of the government to oversee the transaction. The question then becomes one of the degree of regulation.

Hong Kong has been known as the world’s freest economy. The Special Administrative Region of People’s Republic of China ranks No. 1 in the 2016 Index of Economic Freedom. Quite remarkably, the Index scored Hong Kong 97.4 out of 100 in terms of business freedom under the category of regulatory efficiency (Miller and Kim 2016).¹ How should the sales of residential properties be regulated in the world’s freest economy?

The sale practices were loosely regulated until the last decade of the twentieth century; but the need for consumer protection in this field of activity was firstly discussed by the Consumer Council in 1977 (CC 2014) and systematically studied in 1989 (CC 1991). With the growing concern of consumer rights in property transactions, the regulation has steadily increased since June 2010 (Lin 2012). It was pointed out in 2010 that the Hong Kong Government should strike a balance between market efficiency and consumer protection on the one hand, and developers’ interests and the fear of government intervention in the market on the other hand (Goo 2010).

Then, in 2012, Hong Kong passed a new piece of legislation that arguably represents the strictest regulation over sales of first-hand residential properties in the world.

For Hong Kong Special Administrative Region (HKSAR), the enactment of the Residential Properties (First-hand Sales) Ordinance (Cap 621) (hereafter the Ordinance) in 2012 represents a milestone in a decade-long process of constructing a transparent and efficient first-hand residential real estate market in the region. The process can claim its beginning as early as the 1960s, when the first case of incompletion occurred in the region’s earliest off-plan sales (i.e., the Peony House Incident). The incident triggered the first efforts of government intervention and led to the introduction of the Consent Scheme in 1969 (Fan 2005). The Scheme exhibited an awareness of higher degree of consumer protection in the 1990s where the focus of government monitoring gradually shifted to information disclosure. The process has been accelerated since the first decade of the millennium with a growing request for frank and accurate information disclosure in the market. After rounds of development where more and more substantive measures were introduced to the Consent Scheme from June 2010, the need for consolidating all the rules in the form of one legislation emerged. Finally, the Bill drafted by the Transport and Housing Bureau passed the legislature after three readings and a number of amendments in 2012. The Ordinance came into full effect on 29 April 2013.

As such, seemingly paradoxically to its pursuit of business freedom, Hong Kong has passed a law to standardize sale practices of first-hand residential properties. Although the new legislation mainly operates on the acts of developers (some of its provisions apply to real estate agents too), the law is grounded in the need for consumer protection in the residential real estate market. It has placed the value of constructing a transparent, efficient market over the value of maintaining a free market with minimum government intervention. In other words, Hong Kong has given its unequivocal answer in giving priority to consumer protection and the construction of a transparent and efficient market at the costs of strong government intervention with substantive aggressive regulation over a market in which there has been a high degree of business freedom.²

Such preference is evident in the legislative purpose of the Ordinance: i.e., to enhance the transparency and fairness of the sales arrangements and transactions of first-hand residential properties and consumer protection, and provide a level playing field for vendors of first-hand residential properties (LC 2013). The Sales of First-hand Residential Properties Authority (SRPA) established under section 86 of the Ordinance also highlights transparency as their core value (SRPA 2013). Thus the meaning of the word transparency in the context of sale of property transaction is worthy of exploration.

To start, the word transparency in Latin etymology means being seen through; therefore in physical science, a transparent object has the property of transmitting light without appreciable scattering; the definition has been metaphorically adopted by social science to ‘connote the ability of interested parties to see through otherwise private information’ (Schnackenberg 2009).

A recent liberal elaboration on the concept by Fortune Magazine suggests that transparency means making the practices, policies, algorithms, and even code, operating data, and future plans available to customers, employees, or business partners – [which] runs counter to traditional business practices (Hagel III and Brown 2014). The standard is probably a bit forward-looking for any traditional business practices including property development business. This is certainly not within the meaning of transparency that is accorded to the Ordinance. Yet, it explains the concept in the context of running an enterprise in the twenty-first century.

Transparency is classically defined and most frequently cited as a state of a functional market ‘when much is known by many’ (Starke 2016). The ‘much’ which is ‘known by many’ refers to the information on various aspects of the goods. The concept of transparency i...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of illustrations
• Preface
• Acknowledgement
• 1 Introduction
• 2 The way to legislation
• 3 Saleable area
• 4 Gross floor area
• 5 Internal structure, fittings and finishes
• 6 Location
• 7 Floor number
• 8 Date of completion and lease term
• 9 Deed of mutual covenant and land grant conditions
• 10 Price list
• 11 Sales arrangement
• 12 Transaction
• 13 Information channels
• 14 False or misleading information and misrepresentation
• 15 Regulation by legislation
• Index