Success brings the boot in Hong Kong's rental market, where landlords have it their way

It might seem that Financial Secretary John Tsang has been beaten up enough for that blog post in which he expressed dismayed wonder that dishwashers can earn as much as HK$12,000 a month. In fact he has not.

Tsang was called out for being insensitive to wealth disparities in Hong Kong, while overlooking the obvious fact that high rents are a much greater burden for businesses than the cost of low-skilled labourers.

But there is another key plank to his inanity. The rising wages of dishwashers is directly related to Tsang’s budget policies. To paraphrase an old US political slogan: It’s the fiscal expansion, stupid.

This is not a complicated economic concept at all. Fiscal expansions executed during a tight employment market will tend to push up wages.

READ MORE: HK$12,000 to wash dishes? Hong Kong financial chief John Tsang laments effect of ‘soaring’ wages of the low-skilled on city’s business owners

The government has pencilled in an overall 11 per cent increase in spending in the 2015-16 budget over the previous year. Bursting with surpluses, Hong Kong is under pressure to spend money, and is trying to do so in ways that do not create long-term dependency on the state. Instead of expanding welfare benefits in a permanent way, Hong Kong has in recent years handed out a number of one-off sweeteners, while investing in the city’s long-term development and competitiveness.

Fair enough, but it means we are going a bit crazy on capital works. Spending on infrastructure has been earmarked at HK$76.1 billion in the 2015/16 budget. Indeed, it is the second biggest item in the budget – greater even than health care - and was bested only by the HK$79.3 billion allocated for education.

With the throbbing of jackhammers everywhere, basic construction workers reportedly can get HK$1,000 or HK$1,500 a day in some cases, which is adding to a shortage of workers elsewhere in the economy.

Colin Clarke has worked as a pub manager or owner for many years in Hong Kong, most recently in a congenial, English-style pub called The Blue Goose. Over the years he has observed that about once a week, someone would pop in and inquire about a job. Not so more recently. Last year, he put up a sign asking for kitchen staff, but could not find help.

Clarke has just moved the Goose from Lockhart Road in Wan Chai to Main Street in Yung Shue Wan, Lamma Island and, as you can guess, this had nothing to do with the staffing problems in town. Two months before his three-year lease with a plus-three option was up for renewal, the landlord – a new owner – gave him the boot.

After being in that same location for a decade, Clarke was stunned at the short notice. “The rent kills everyone. There’s no control. [Landlords] can do whatever they want,” says Clarke.

Allan Leung Kwanlun, who runs the Red Cat hairdressing salon, never had the luxury of staying at the same place for a decade. He has moved every few years since he started his business in 2003, and has a number of theories as to why it works like this in Hong Kong.

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As a renter, Leung’s strategy had been to find iffy quarters in quieter corners of SoHo, where the rents were more bearable. Then he would perk the place up, with arty interior designs and frontage, and create foot traffic with his clientele.

The problem with success, of course, is the landlord responds by seeking a big rise. This week Leung is moving out of SoHo altogether, to High Street in Sai Ying Pun.

Landlords take a risk in kicking out a successful tenant. Leung believes their willingness to take this risk is related to the “flipping” culture in Hong Kong. In his view, landlords are less worried about a place sitting vacant because once they finally do get a killer rent, the resale value of the property is boosted by this high documented-rental yield.

In any economic system there are trade-offs. Hong Kong depends on high land values for revenues, and the city’s long-term prosperity and economic vibrancy speaks well of this strategy.

But there are downsides, most obviously the punishing rents which have been blamed for inhibiting small businesses and facilitating big-business cartels. If there are cracks and stresses in the system today, don’t blame the dishwashers. They have in fact long had hold of the short end of the stick.

Cathy Holcombe is a Hong Kong-based financial writer