Hong Kong Headed For a Crash?


The Atlantic has an article on Hong Kong’s Jittery Housing Frenzy.  The article starts off with an extreme example, citing the apartment on The Peak that sold over the summer for US$60 million.  And then goes on to the recent IMF warning that a slowdown in the HK real estate market could have dire consequences for the local banking system because the property sector represents roughly half of all outstanding loans in the territory.

The Atlantic counters by mentioning that HKers generally don’t default on their loans as well as the fact that the majority of mortgages are on places where people have put down a greater than 50% down payment. But a downturn would obviously affect other industries, ranging from construction to retail.

But the city’s government is unlikely to allow a real estate price correction that could damage property developers or banks. The Hong Kong government tends to aggressively pursue land policies that make sure its property tycoons–such as Asia’s richest man, Li Ka-shing–and its banking system stay healthy.

Not allowing a house price crash will harm Hong Kong in the long run, as independent economist Andy Xie points out here. He says that the city has been squeezing land supply for over a decade. In Xie’s words, policies that keep property prices inflated, for the benefit of banks and developers, hurt the city overall.

Hong Kong probably isn’t heading towards a banking crisis, then. But it may be on the edge of a social crisis. Hong Kong policymakers might simply react to the IMF’s warning with new plans to restrict land supply. That could ensure that people’s homes, instead of getting cheaper, just get smaller.

The Atlantic also mentions that new HK apartments are referred to as “shoeboxes” due to their tiny size.  I think “shitboxes” might be a more appropriate name given that:

  1. Developers are legally allowed to lie about the size of the apartment, including a percentage “common areas” such as the lobby, the clubhouse and hall ways in the advertised size.
  2. Newer Hong Kong apartment buildings are constructed to look luxurious with gorgeous facades and grand lobbies while the cheapest possible materials are used in the apartments themselves.

That linked piece by Andy Xie hits the nail on the head – repeatedly.

Hong Kong’s economy is suffering. Between 1997 and 2011, nominal gross domestic product grew by 2.6per cent, per capita income by 2per cent, and the average salary by nearly 2per cent every year. Over the same period, the cost of living shot up – oil prices quintupled and food prices doubled – while China’s labour costs tripled. It’s easy to see why Hong Kong people are not happy.

More damaging is how concentrated in property and finance the Hong Kong economy has become. In 1997, aside from the property bubble, Hong Kong was leading the Pearl River Delta’s industrialisation with the attendant high-valued-added activities such as research and development, trade finance and marketing based in Hong Kong.

But the high cost of doing business due to high property prices and rent has pushed away such businesses. The only new business that has helped Hong Kong is retailing to mainland tourists. But selling European products to Chinese tourists is a low-value-added business. Only landlords benefit significantly from it.

The social cost of squeezing supply to support a high price could precipitate social turmoil. While Hong Kong is considered a high-income economy, numerous families, many with members of three generations, live in one room. More than two-thirds of Hong Kong’s land is undeveloped. And reclamation, the main source of new land for Singapore, has potential in Hong Kong. So, while popular perception attributes high property prices to a land shortage, it is utterly untrue. Hong Kong’s elite fuels this misperception because they want to keep people in the dark.

No great city can thrive just on dodgy businesses like property speculation, arbitrage exploiting someone else’s loopholes, or helping powerful people rob their countries. True, such businesses also exist in London and New York. But those cities have diversified activities to provide a decent living for the local populations, even as the elite profit from the dodgy activities. If Hong Kong’s economy is to thrive, it must make Hong Kong people competitive.

Unless Hong Kong cuts property from its economic centre, it doesn’t have a good future. Property isn’t a productive asset. It is worth money only because the people who use properties are competitive. When policy squeezes up property prices by restricting supply, it just prices more and more people out of the modern economy. As their numbers accumulate, discontent will grow.

Hong Kong must control land supply according to its development needs, not to set prices. The city should first set targets for the size of its population and housing conditions – say, a minimum living space of 200 square feet per person – and land supply should follow. The current property bubble will eventually burst, like the ones before, when the US Fed raises the interest rate. And when it does, the government must resist manipulating supply to support prices. It should be viewed as an opportunity to restructure the economy.

So there you have what you should have known all along.  The prices of Hong Kong real estate are manipulated by the government to benefit the billionaire cartels to the detriment of the millions of people who live here.

At the same time, we’re going through this idiotic protest against Hong Kong Chief Executive C.Y Leung over some illegal additions he made to his home.  Ole C.Y. has handled this poorly.  He should have made a speech in which he said, “So, what the fuck?  Everyone does it.  How does this impact my qualifications to govern?”  Instead he hemmed and hawwed and issued a bunch of half-hearted denials and dismissals, acting as if he was trying to deny getting a blow job from a hooker rather than putting up a trellis to have a bit of green covering his house. There was even a vote of no confidence held in the Legislative Council, though the motion didn’t pass.

What’s the point of all this?  Here’s my opinion.  The billionaires control the government, with an out-sized representation in LegCo as well as in most government advisory bodies.

Meanwhile, C.Y. Leung’s policies in his six months in office are being seen as anti-tycoon, to at least some degree.  Had Henry Tang been appointed, he undoubtedly would have continued Donald Tsang’s disastrous pro-billionaire slant.

So while it’s not logical to suspect that a no confidence vote might have been anything other than symbolic (does anyone think that if this had passed, China would suddenly go, “Oh, right, C.Y., you gotta go”?) what’s clear to me is that if Hong Kong’s billionaires hate C.Y. Leung, that automatically puts him on my top ten list of good people.

Always on my top ten list of shit heads is Jackie Chan.  This billionaire actor was quoted in 2009 as saying, “I’m gradually beginning to feel that we Chinese need to be controlled. If we are not being controlled, we’ll just do what we want.”

Now he’s said, “Hong Kong has become a city of protest. The whole world used to say it was South Korea. It is now Hong Kong…  People scold China’s leaders, or anything else they like, and protest against everything… The authorities should stipulate what issues people can protest over and on what issues it is not allowed.”

Chan, who famously does his own stunts, has probably been dropped on his head a few times too many.



One thought on “Hong Kong Headed For a Crash?

  1. Private Beach

    There are some good points here, but also some over-simplifications. It’s undeniable that high property prices harm Hong Kong in many ways. But 35% of local homes are owner-occupied (mine included), and a crash would slash the value of what for many is their major – perhaps only – significant asset. A US-style shakeout would probably see the government bailing out the banks while leaving the unfortunate home-owners to suffer the consequences.

    Secondly the statement that “More than two-thirds of Hong Kong’s land is undeveloped” ignores the fact that – unlike Singapore’s, which is largely flat – much of the undeveloped land here is mountainous. Much of the “unused” land is actually country parks (40% of Hong Kong’s total area), which serve valuable functions as reservoir watersheds (how long do you think China will have spare water to sell to Hong Kong at its own usage expands?), recreation areas (of which we will need more, not fewer, as the population grows and the territory becomes increasingly urbanised), and a vital habitat for wildlife, some of it rare or threatened. Being extensively forested, they also help to mitigate Hong Kong’s appalling air quality.

    Xie’s article fails to address one important issue. There is another influential group besides billionaire property developers which benefits from current property policies. How much longer can the government maintain the “small house policy” in the face of a desperate need for more housing?

    The fuss over CY Leung’s illegal structures is, I think, not about them per se, but results from the public perception that he came to power by painting himself as clean of that particular fault by comparison with Henry Tang, when it turned out that he was doing exactly the same thing. This brings the validity of his election (assuming you think the small circle election process has any validity in the first place) into doubt.

    As for Jackie Chan, does it not occur to his tiny brain that telling people they cannot protest against certain things would just give them one more thing to protest about. In addition to all the usual stuff, we would have anti-ban-on-protest rallies every week – ideally right outside one of his several luxury houses!

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