There is a doomsday machine on the horizon that could destroy Hong Kong home prices
Low-quality living in Hong Kong won’t be worth a premium once the border with China comes down
The Basic Law expires in 2047. Like any vital government agreement, a long lead time is needed for renegotiation. Consultations need to start now in order to announce new arrangements around 2020.
Markets hate uncertainty and the longer that Hong Kong and Beijing don’t deal with the principal arrangements the more risk of business and social instability.
No single event in the near future – supply and demand of land or credit – will be as crucial to the Hong Kong property market as significant policy changes in Hong Kong’s land banking and usage policies. Up till now property owners and developers have benefitted from a relatively unchanged set of public policies since 1997.
The run up to 2020 and the subsequent years will be a crucial period that will indicate if the central government understands the need for fundamental reform in Hong Kong’s property market. Or if Hong Kong’s establishment can convince Beijing to keep the status quo. The expiry of the Basic Law doesn’t mean that it ceases to function, but rather that changes are possible. And with no British government negotiating on the other side, the Hong Kong government can only consult with Beijing.
Banks who are already engaged in mortgage lending in mainland China have indicated that if Hong Kong becomes a contiguous part of the mainland they will price the mortgage risk at the same level as Guangzhou. While that foretells risk assessment, it is unknown how the Hong Kong government’s land policies will change.
The government’s actions in public housing alleviate some of the obstacles facing first-time owners. But, it has only taken minor actions in the private housing market. Increased stamp duties have proven to be ineffective to solving the genuine problems in the private sector.
Abuse of land banking rules by developers will remain a pernicious problem as long as strictly enforced conditions are not imposed on government land sales. As long as an artificial border exists between Hong Kong and the rest of China, a group of wealthy developers with adequate financing can corner the entire local private residential market. By announcing a contiguous border with Shenzhen and Guangzhou, the resulting massive conurbation would level out Hong Kong’s flat prices.
Up until now, Hong Kong has pretty much been run as a village – one where one of history’s greatest wealth transfers (besides the 2008 financial crisis bailout) has occurred over the past 20 years through an overpriced and oligopolistic property market. The Basic Law originally intended that Hong Kong be treated and protected as a special enclave at a time when mainland China’s future was uncertain. No one thought that it would perpetuate its own distortions and uncertainties about 20 years later.
A UBS report estimated that Hong Kong’s property prices have increased by 340 per cent since 2003. Hong Kong’s absurdly high property prices have taken on a life of their own, creating the illusion of near religious permanence. In fact, there is no such thing as inherent value. All value is subjective.
But Hong Kong’s property market represents the outcome of structural corruption and that can only be cured by determined public policy that treats home ownership as a national priority rather than raw material for developers to enrich themselves.
If Hong Kong’s future is to be based on a service economy where technology, knowledge workers and creativity are to play greater roles than property flipping and serving property flippers, then its property market must undergo a fundamental, nearly impossible change.
The ease of doing business and living in Hong Kong relative to mainland China represents a competitive advantage for developing talent. Its almost like the American H1B visa that has helped build the technology sector. The city’s future lies in cultivating an eclectic mix of locals and foreigners rather than acting as a bridge for mainland China because it needs Hong Kong less and less with each passing year.
Beijing’s dependence on Han Chinese nationalism cannot possibly yield the unpredictable and bold innovation made possible by America’s volatile mix of immigrants. It’s easy to compare nominal living prices to New York or London or San Francisco.
However, no successful creative person living in those places would ever consider living in Hong Kong’s low-quality flats unless prices fell by 30 per cent to 40 per cent. Those major cities are more culturally vibrant, intellectually diverse and cleaner than Hong Kong. The Hong Kong psyche is notoriously resistant to change, but sometimes changes will be thrust upon you.
Peter Guy is a financial writer and former international banker