Stability will only return when Hong Kong ends its property tyranny

http://www.scmp.com/comment/insight-opinion/article/1616266/stability-will-only-return-whenhong-kong-ends-its-property?page=all

Andy Xie says Hong Kong must restructure its property market to help ordinary people - rather than milking them for the benefit of the business elite - if stability is to return

Sky-high property prices are the root cause of the ongoing social instability in Hong Kong. When the average household would have to put aside all their salary for 10 years to afford to buy the space for a bed - never mind eating and drinking, and other living expenses - or that incomes have grown by only 10 per cent in a decade, where is the hope for ordinary people, especially the young? Unless Hong Kong restructures its property market to serve the people, instead of milking them to the last drop, the city won't see stability again.

Hong Kong has been run like a medieval city state. A business elite at the top has the dominant voice on how wealth and income are created and distributed. Hong Kong's system encourages people to make money with maximum economic freedom and low taxes.

Tight land supply adds to the problem - often a result of hoarding by a few of the big boys. The banking system is structured to load people with a mountain of debt, which means people must work even harder to keep their tiny apartment.

The system worked when incomes were rising rapidly. When China was not fully open up to the world, Hong Kong had plenty of opportunities as a bridge between the two, and could charge a hefty premium for the service. After China joined the World Trade Organisation, those opportunities as a middleman vanished. Taxing people with ever higher property prices couldn't work anymore. But Hong Kong's system didn't adjust to the new reality. The ensuing instability is hurting everyone. The city's ruling elite, through uncontrollable greed, have done themselves in.

In contrast, Singapore has been run like a proper dictatorship. The system doesn't do stupid things to hurt its ruling class. It focuses its greed on foreigners and distributes the spoils among the people through good public housing, quality education and health care, and a nice pension. Most Hong Kong people seem to like Singapore.

When you think about it, medieval city states like Florence and Venice flourished using the same policies. They used strong militaries to protect their trade monopolies and, sometimes, just looted others when opportunities arose. Because their ruling elite had the wisdom to distribute the loot among all contributors, their enterprises or scams lasted for centuries. Their luck finally ran out when rising nation states built bigger militaries.

Both Hong Kong and Singapore are leftovers of the British colonial era. They have enjoyed much higher incomes than their giant neighbours by arbitraging their inefficiencies. The business model is not so different from Venice or Florence centuries ago. As their neighbours change, they must adapt to sustain their income premium. Instead of building ships or making semiconductors, Singapore has switched to casinos and private banking. Maybe these businesses don't smell so good, but they bring in the money to buy social peace.

Hong Kong hasn't adapted. When the old model doesn't work, the instinct here is to squeeze supply further. When the price is too high, let's carve a flat into several smaller ones. Wouldn't that make housing affordable? Hence, mini-flats have now become popular for speculators. But, even mini-flats are unaffordable. What's next? Should people learn to sleep standing up or hanging upside down?

The usual excuse against change is that Hong Kong doesn't have land. This is a big lie. Only 4 per cent of Hong Kong's land is given over to residential use. There is the same amount of reserved development land, and big developers hold a considerable chunk of it. Singapore has been developing mainly on reclaimed land. It has a real physical shortage, but has kept public housing cheap and spacious. Land isn't a constraint to Hong Kong's development.

What stands in the way is Hong Kong's ruling elite, a leftover from the colonial era, hanging onto the old model no matter what. Since they don't have other sources of competitiveness, changing would mean the end to their privileged status. This is why meaningful change won't happen through consultation among the elite. Some force has to impose the change. If Beijing wants stability in Hong Kong, it must focus on property, which means ditching its business friends.

In addition to artificially controlled land supply, interest rates play a role in the price cycle. But this confuses the debate. The interest rate cycle introduces volatility. So, if the US Federal Reserve raises rates to 3 per cent within three years, Hong Kong's property prices may fall by 50 per cent over that time.

Yet housing still wouldn't be affordable. When the price begins to fall suddenly, the debate will surely shift, and political support for limiting supply will return. Hong Kong could repeat the cycle.

Ruling Hong Kong requires a long-term vision, not the zig-zagging we've seen since the handover. During the Asian financial crisis, Hong Kong abandoned its expanded, but still modest, public housing programme, laying the seeds for today's instability. Policy responses now should focus not only on short-term issues.

Hong Kong Home Prices Seen Firm as Volume Drops Amid Protests

http://www.bloomberg.com/news/2014-10-16/hong-kong-home-prices-seen-firm-as-volume-drops-amid-protests.html

Hong Kong’s existing home transactions dropped amid pro-democracy protests now in the third week. Prices are holding firm.

The number of homes changing hands fell about 20 percent so far this month, compared with the same period in September, as buyers and sellers become more cautious, according to Sammy Po, residential chief executive at realtor Midland Holdings Ltd. While some homeowners have been more willing to accept prices cuts of as much as 3 percent since the protests began, most haven’t budged, Po said.

Home prices, which hit new highs last month, won’t be significantly affected by the political standoff that saw as many as 200,000 protesters occupy Hong Kong’s key roadways, said property broker Savills Plc. Homeowners aren’t in a hurry to offload their properties, even as some potential buyers are deterred by the city’s political uncertainties, according to Citigroup Inc.

“It’s a normal reaction for people to take a wait-and-see approach,” said Wong Leung-sing, an associate research director at Centaline Property Agency Ltd., Hong Kong’s largest privately held realtor.

Existing home prices, tracked by Centaline, dropped 0.4 percent in the week ended Oct. 5 after the protests started on Sept. 26. Prices, which declined as much as 5.2 percent since the government doubled a property tax in February last year, have rebounded 7.3 percent this year.

Forecast Cut

Protesters are demanding elections of Hong Kong’s chief executive free from the influence of China in 2017. The rally that started outside the government headquarters has spread to main arteries in the city’s main business district and prime shopping areas, and has prompted Bank of America Corp. to cut its economic growth forecast for Hong Kong this year.

“If it persists and worsens, it will affect people’s livelihood and the economy,” said Midland’s Po. “Then the weakened purchasing power will affect the property market.”

The chance of the movement seriously disrupting Hong Kong’s economy is slim whereas the probability of rising interest rates is much higher and likely to have a greater impact on housing demand, said Nicole Wong, regional property research head at CLSA Ltd.

Hong Kong rates track those in the U.S. because the local currency is pegged to the U.S. dollar.

“The market will likely remain in its current state -- rising prices amid low volume -- until rates increase,” said Wong, who called for home prices to drop 10 percent next year and a further 5 percent in 2016.

Political Outlook

Three projects have been offered by developers since the start of the protests, including a 1,092-unit project by New World Development Co. (17) and Henderson Land Development Co. (12) All three have had “decent sell-through rates,” Ken Yeung and Oscar Choi, Citigroup analysts, wrote in an Oct. 14 note.

The Hang Seng Property Index tracking returns of nine developer stocks, declined 1.9 percent since Sept. 26, compared with the 2.8 percent drop in the benchmark index.

Developers have lured buyers from the existing home market with discounts and subsidies, narrowing the premium that usually is paid for new flats, since the government slapped on three rounds of taxes aimed to control surging prices. New World, for example, offers as much as a 6 percent cash discount as well as rebates on property taxes at its Pavilia Hill residential development, one subway stop from the prime shopping district of Causeway Bay.

The protest movement “isn’t particularly germane to prices or volume,” said Simon Smith, senior director of research and consultancy at Savills, citing government measures as the main damper on transactions. “We’ll have to reconsider if the disruptions last considerably longer. As yet, it’s far too early to say.”

To contact the reporter on this story: Michelle Yun in Hong Kong at myun11@bloomberg.net

To contact the editors responsible for this story: Andreea Papuc at apapuc1@bloomberg.net Tomoko Yamazaki

The end of the Hong Kong 'dream'

http://www.aljazeera.com/indepth/features/2014/10/end-hong-kong-dream-201410592243801352.html

Students say connections to the mainland have supplanted meritocracy where good jobs and university spots are concerned.

Hong Kong, China - It used to be a place where anyone who worked hard, excelled in school and possessed an entrepreneurial spirit could rise above their parents' hardship to a better life. That was the Hong Kong dream.

Today, that dream has become a mirage - where meritocracy is seen to be supplanted by business and political connections, where good jobs and university places are keenly contested by the mainland Chinese. Young people in Hong Kong fear they are losing out as the playing field tilts increasingly towards China.

The tens of thousands of people protesting on the streets are not just fighting for democratic reform, they are also struggling for their economic survival in the former British territory returned to China in 1997.

"After 1997, you have to have good connections to get a good job. This is not an equal opportunity society anymore," said 54-year-old Jason Wong, a retired investment banker. "The rich and those in power have a better chance."

The son of a grocery store worker, Wong said he was able to move up in life through hard work and diligence because "social mobility was still easy during his time".

"I come from a poor family. During my generation, if you work hard, you can fight all the way to the top and accumulate your own assets. Everyone has an equal chance to fight for what they aim for," said Wong.

But it is not so now for many in the next generation.

"It is very difficult to move up now," said 27-year-old Bonnie Chau, a secretary who has been demonstrating since the start of the protests. To get a better salary, Chau is studying for a master's degree in corporate governance by attending night classes at the Chinese University of Hong Kong.

Cherished dream

One in five Hong Kong residents, or about 1.3 million people, live under the poverty line, according to government figures.

In a society where families cram into tiny apartments, owning a home is a cherished dream for many young people. But property prices on Hong Kong island, home to some 1.2 million people, are the third-most-expensive in the world after Monaco and London, according to the Global Property Guide website.

"When you don't have a good career, a good property, how can you be loyal to this city?" asked Wong.

Soaring property prices and land shortages, coupled with buying sprees and speculation by rich mainland Chinese, have pushed the cost of an apartment beyond the reach of many here. With starting salaries for new graduates at about $12,000 Hong Kong dollars (US$1,500) a month, it is almost impossible for young people to purchase their own homes.

"After sending money home to my parents, pay the rent, tuition fees and the high cost of living, I have no money to save for the future," says Chau. "An apartment costs around $7m HK [US$900,000]. How can I buy one? I can't even pay for the deposit."

The "one country, two systems" formula agreed on when Britain gave control of Hong Kong to China guarantees the region a high degree of autonomy and freedoms not enjoyed in mainland China, with the right of Hong Kongers to choose their leader set as an eventual goal.

"That is why it is critical for us to be here to fight. We are not seeking independence. We know we are part of China. But we are different from China," said a 24-year-old student who works and studies at the same time. He has ties to the mainland, and asked not to be identified by name.

"We have an independent judiciary and a free press. We are just asking what was promised to us. If we don't fight, we will become just like another city in China."

The mainland moves in

Hong Kong is the world's most service-oriented economy, with the service sector accounting for more than 90 percent of GDP in an economy valued at US$272.5bn in 2013, according to the Hong Kong Trade Development Council.

Since Hong Kong returned to China in 1997, many mainland Chinese companies have listed on the Hong Kong Stock Exchange.

A total of 1,716 companies are listed on Hong Kong's mainboard - Asia's second-largest - and the Growth Market Enterprise, an alternative stock market. Of these, 854, or 49.8 percent, are mainland Chinese companies.

Willy Wo-lap Lam, a China scholar at the Chinese University of Hong Kong, told Al Jazeera that mainland businesses were slowly pushing out Hong Kong businesses.

"This is happening gradually but relentlessly," says Lam. "So they are gradually controlling the economy and they are edging out the local companies. Within 10 to 20 years, it will be totally dominated by PRC [People's Republic of China] companies."

Al Jazeera contacted the Chinese General Chamber of Commerce and pro-business The Better Hong Kong Foundation for comment, but received no response.
Many students Al Jazeera talked to said it is difficult to get a good job with companies based on China's mainland.
"Employment for Hong Kong youngsters is getting more difficult. These mainland companies keep exporting elites from China to Hong Kong to work," said a 21-year-old student, who requested anonymity because his parents are civil servants and he did not want reprisals against them.

"We know the door is shutting on us. It is so clear for us to see."