Hong Kong’s property cartel is pushing wealth inequality to the brink
Raising welfare and pension payments, and reforming the MPF isn’t going to solve the main problem – a persistent property bubble sustained by a cartel
When a Hong Kong government cabinet secretary mocks my ideas on how to reduce poverty and improve equality on a television show it is worth examining whose version of economic reality we are living in.
I recently participated in a Channel News Asia panel interview about economic inequality in Hong Kong with Dr Law Chi-Kwong, the Secretary for Labour and Welfare, and three other guests.
All the panellists agreed that Hong Kong is very market-driven. But in residential property, market failure, artificial squeezes on apartment sales and land banking have distorted and pushed pricing for such a long period that society faces a breaking point.
Yet bureaucrats refuse to recognise the need for change.
Dr Law believes minor improvements in social welfare schemes, old age pensions and the Mandatory Provident Funds scheme will significantly alleviate the inequality issues facing the city. This shows he and his colleagues are woefully detached from the perils facing Hong Kong. Their “solution” is akin to rearranging the deck chairs on the sinking Titanic. Social unrest and economic stagnation are lurking just below the surface.
It’s worth repeating that in Hong Kong the average home costs a ridiculous 18.1 times the median salary, according to Demographia, compared to 11.8 in Vancouver and 12.2 Sydney. Marginally increasing welfare and pension payments, and reforming the MPF scheme isn’t going to do much to solve Hong Kong’s main problem – a persistent real estate bubble that is sustained by a property cartel. But this is where the interview descended into an exercise in argument rather than factual investigation.
Such a large gap in wealth and earnings in a city where property generates much of the wealth, as house-price increases outstrip income growth, requires government to intervene on the demand side of the property market. Economic growth and development are already suffering from the burden.
Busting monopolies and cartels is one of those rare causes that can unite rabid populists and objective academics. But not in Hong Kong. For some deep-seated cultural reason, Hong Kong defers to them. Restricting the sales of certain sizes of Hong Kong flats to just residents, thereby segregating a portion of the property market from foreigners, would relieve demand from outside.
Loke Wi Sue, the show’s host, remarked that Secretary Law’s eyes rolled back in scepticism as I asked why the government can’t control how local developers sell flats. Condescension is poured on any ideas outside the constrained HK policy-tool box of increasing supply. “You saw his reaction, how very unbelievable and incredible,” Loke said.
When I propose that reducing property prices is an effective way to redistribute wealth, Dr Law can barely contain his laughter. “You have to show me the evidence,” he said, rejecting the simple proposition that lower property prices will reduce costs and increase wealth and income.
But with each barely credible rise in property prices comes a smug, self-justifying argument – that any drop would destroy newly created wealth and affect income, as if this speculative wall represents productive wealth. The collective courage to address the unsustainable effects of entrenched interests is not even considered by government leaders.
It confirms what legislative councillor Regina Ip Lau Suk-yee bluntly told me earlier this year in an interview: that the civil service cannot muster the will and capability to reform itself, overcome its historical, colonial role and take a more active role in the property market and economy like Singapore or China.
The idea that government must treat property as a strategic social and economic resource for nation-building and directing the economy rather than a raw material for the purely profit-seeking motives of a property cartel is impossible for Hong Kong’s senior bureaucrats to comprehend. The litany of excuses based on “one country, two systems” and the Basic Law are endless. Yet we have time to fret over the details of how to incarcerate those who disrespect the national anthem.
The conduct of our property developers certainly makes them the cause of many of the problems that threaten Hong Kong’s stability and erode its competitiveness. I regularly dine with those people who have the greatest vested interests – senior executives from top developers. Their responses range from scorn to apathy.
One chairman blithely said: “Hong Kong has always been a high-pressure place to live and that shouldn’t change.” Another’s primary complaint is that it takes more than the usual three years to build a residential project “because of politics and bureaucracy”.
Speculators say that those who complain about a bubble are sitting on the outside, not benefiting from it. But as the illusion continues it appears so real to owners that there is no return. There’s no way back from the high property-price policy that infuses this government’s overall economic policy. The only question remaining is how it will deal with the fall out.
Peter Guy is a financial writer and former international banker