FINANCIAL SYSTEM AND ECONOMY
Property Market
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Closely related to the building and construction sector is the property market. The vacancy position for all types of property was very high at the end of 1981 and this trend continued during 1982. Although there were indications that developers had been making adjustments in the pace of ongoing building work, completions in terms of total usable floor area continued to be substantial in 1982. Against the background of a generally abundant supply in relation to demand, and affected by the economic recession, property prices and rentals on the whole declined throughout the year, with prices falling faster than rentals.
Trading in the residential property market in 1982 remained depressed. During the year, a few large marketing exercises in respect of small flats close to Mass Transit Railway stations reported some success, but these seemed to be exceptions rather than the rule. Although the continuous easing of the mortgage rate from the historically high level of 21 per cent in October 1981 to 12 per cent in November 1982 led to a substantial reduction in monthly mortgage payments, prices of flats were still high relative to the average incomes of potential home buyers. In view of the uncertainty about the general economic situation and in anticipation of further price falls, potential home buyers appeared to be reluctant to commit themselves. The property market was given some encouragement in November and December when a number of banks and financial institutions offered new 20-year mortgage schemes to potential owners of property.
Rentals for residential property followed a declining trend during the year. So far as rentals for existing leases were concerned, meaningful interpretations are difficult to make because increases in rents for most private domestic accommodation were controlled, apart from those at the upper end of the scale.
On commercial property, the additional supply of commercial premises, including shops and offices, was substantial. As a result of the previous increases in prices and rentals, and the generally weak performance of the Hong Kong economy, demand for commercial property slowed down. On the whole, prices and rentals which had been increasing in 1981 declined in 1982. The decline was particularly marked for those in areas with gross over-supply. Demand for industrial property was also affected by the poor performance and uncertain prospects of the export sector. Given the high vacancy position at the end of 1981 and substantial completions in 1982, prices and rentals also continued to decline.
Inflation
In 1982, the rate of inflation as measured by the Consumer Price Index (A), which is representative of the price increase faced by the relatively less well-off 50 per cent of households in Hong Kong, showed an increase of 10.6 per cent. This represents a significant slowing down when compared with increases of 15 per cent in 1981 and of 16 per cent in 1980. Apart from the easing of the rate of inflation elsewhere in the world, the influence of internal factors was also favourable. In contrast with the previous year, aggregate demand in the economy was not imposing much pressure on aggregate supply and hence the general price level and the underlying growth rates of the money supply and of credit were slower than in 1981. The decline in property prices and rentals also contributed to the slowing down in the rate of inflation. The weakness of the Hong Kong dollar in the fourth quarter could, however, affect the price level adversely in due course.
Public Sector
For the purpose of formulating annual budgetary policies, the public sector is defined in terms of the deployment of funds under the government's control. Public sector expenditure