OPINION
Mind the Gap
by

Hong Kong’s developers see ever-shrinking flats as elixir to city’s housing crisis

The biggest enemy of serious property reforms are developers and government bureaucrats who will continue on their path until social and economic breakdown occurs

PUBLISHED : Monday, 14 August, 2017, 8:46am
UPDATED : Monday, 14 August, 2017, 8:46am

Hong Kong’s middle class has been economically transformed from the “sandwich class” into the “coffin class.”

Those looking for property salvation through a big crash, due to a rise in interest rates, can kiss their impossible dream goodbye.

Analysts failed to factored in how property developers – all acting in their own interests in a poorly regulated local market – would merely shrink the size of flats and extend the price run in rentals and sales.

Branding flats smaller than prison cells or parking stalls as “nano” or “micro” flats and a “new economy lifestyle” requires the kind of humour that re-labels torture as “enhanced interrogation techniques”.

Unaffordable property prices are plaguing many major cities, but in Hong Kong, the shrinking and deteriorating quality of living in flats is a sign of market failure.

Branding flats smaller than prison cells or parking stalls as “nano” or “micro” flats and a “new economy life style” requires the kind of humour that re-labels torture as “enhanced interrogation “techniques”

It is evidence that the government needs to intervene not just on land supply, but on the demand side. And the demand side means the terms and conditions and financing of flat sales.

Property developers have forced young and desperate buyers into the primary market because nobody can afford high down payments in the secondary markets.

Developers offer 90 per cent financing, give a few years of interest-only mortgage payments to buy even more time until the crash; even with a 50 per cent crash the property developers will still be holding enough equity to prevail.

Earlier this month, Lai Sun Group’s new real estate development offered micro flats as small as 157 square feet in Mong Kok. They sold the first batch of 98 units offered in one Sunday, parking stall sized apartments costing nearly HK$3 million (US$384,000)according to figures obtained by a South China Morning Post.

Many buyers were young, and came to the sales office with their parents and 30 per cent were investors, not end users.

The strong sales results were in contrast to a Citibank survey released in late July, which showed only one out of 100 Hong Kong people considered the second half of this year a good time to buy homes in the city. That’s despite 57 per cent of respondents who still expected home prices to rise in Hong Kong.

Hong Kong’s middle class has been economically transformed from the ‘sandwich class’ into the ‘coffin class’

Extrapolating that statistic, even if only one per cent of surveyed people in the population were confident in buying, that makes about 70,000 people.

That’s a credible buying group with only 98 flats available on a Sunday. So rather than being an indicator of living standards and a normal market, squeezing out a trickle of completed flats just enough to test marginal demand is only a way to maximise and sustain prices and sales.

The economic travesties just keep on rolling in August.

The SCMP reported that Eton Properties is converting 18 flats into 270 units as small as 80 square feet to rent out starting at HK$7,600 as co-living space to young graduates and job seekers in Woodland Villas, on Shouson Hill. It is considered a luxurious complex in one of Hong Kong’s most prestigious neighbourhoods where Li Ka-shing lives.

By subdividing, Eton gets 270 units out of the complex compared with just 18 before conversion. The monthly unit price of HK$95 per square foot is 13 per cent more than for serviced apartment operated by the Four Seasons Hotel in Central.

The government’s commitment to quality of living standards and the economic welfare of its citizens is being sorely challenged by its philosophical reluctance to socialize and regulate flat sales in Hong Kong

Fewer expatriates with generous housing allowances makes it difficult for landlords to find rich tenants.

For Woodland Villas, its 1,600 square foot units were offered for rent at HK$98,000 per month not including a monthly management fee of HK$8,750.

Wealthy mainlanders prefer to buy rather than rent luxury flats, which left Eton little choice but to downsize, to continue owning the complex.

The government’s commitment to quality of living standards and the economic welfare of its citizens is being sorely challenged by its philosophical reluctance to socialise and regulate flat sales in Hong Kong.

There is no shortage of reform proposals – but the biggest enemy of serious property reforms are developers and government bureaucrats who will continue on their path until social and economic breakdown occurs.

Peter Guy is a financial writer and former international banker.

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