Jake's View

Blame American rebels for Hong Kong’s housing mess

But also blame the intransigence of policymakers and bureaucrats who don’t want to go to the trouble of real change

PUBLISHED : Wednesday, 13 January, 2016, 3:21pm
UPDATED : Wednesday, 13 January, 2016, 3:21pm

More than half of the city’s large-scale private housing projects approved by the authorities in the past 25 years were never built due to a combination of bureaucratic red tape and developers drawing out the application process, a university study has found.

SCMP, January 13

Back in 1776 the British government had to confront a fiscal dilemma. How do you make colonies pay for their own defence, a big bill at the time in America, if they rebel when you impose taxes on them?

The solution that the bureaucrats in Whitehall adopted, too late to forestall that rebellion in America, was to claim government ownership of all land in Britain’s colonies and then sell it back to the colonists on long-term leases to cover the cost of administration.

It has proved such a lasting idea that we still have it in Hong Kong today. Blame America. Blame one country, two systems, for preventing any change since 1997.

The problem in Hong Kong’s circumstances is that to put up a new residential development you must pay billions at auction for the land, risk billions more in construction and finance costs, and not see any return on your money for three years or more while you hope the market does not crash on you.

Redevelopment of existing sites offers no relief from this risk burden. The leases specify what sorts of buildings are allowed. If you wish to convert a low-rise industrial block into a high-rise residential one you must first pay a lease conversion premium that covers all the uplift in value.

Yes, it’s a greedy, callous way of doing things but do we fault the shark for being a shark?

Restrictions to control development in other places generally come under the zoning regulations of the local town council. In Hong Kong zoning is just a minor nuisance. It’s all in the lease conditions.

The obvious result is that a few big developers dominate in the industry. The sums required for any but a handful of small projects are simply too vast to allow a broader base of participants.

For the few big developers it’s also all in the timing. You buy your land (or historically force it out of New Territories farmers) at the bottom of the market and then hold tight, sometimes for many years, until you think the time is ripe to change the lease and turn it all into cash.

Along the way the Lands Department may become insistent that you start building as you said you would. If so, you forestall the pressure by tricks such as applying to make changes to your building plans. This eats up time you want eaten up while you wait for the time you want.

Yes, it’s a greedy, callous way of doing things but do we fault the shark for being a shark? Blame 1776, blame the intransigence of policymakers and bureaucrats who don’t want to go to the trouble of real change. It’s the system that has led to this problem. The developers are only gaming the system as the law allows them to do.

But the system also offers a solution not available in other jurisdictions. Where government owns all the land and controls lease conditions it can also charge an annual development tax based on lease conditions that it can change.

To encourage a high-rise residential development on a poorly used site simply designate the land for high-rise and then charge the hefty development tax rate that would apply to such plots. The owner would definitely be incentivised to get busy. It would cost him dearly not to build.

It would be a big change but it would bring many benefits. It would allow tighter control of town planning, it would broaden the development industry in substituting annual lease payments for one-off lump sum payments and it would give the government a much steadier stream of capital revenue.

Yes, I hear you. What’s that you’re smoking, you say.

Yes, reality is that we are frozen in the past with a 1776 land-use model devised for reasons that have nothing to do with present day Hong Kong. We have only the prospect of continued complaint that we are not building enough homes and that big developers are walking away with all the loot.

True. But I am not going to get worked up about it while we refuse to look at the antiquated system underlying it all.