Beijing can end Hong Kong’s housing crisis by brokering a deal with land owners and developers

Hong Kong is facing an unprecedented crisis since returning to China in 1997, with various studies highlighting housing shortages and stretched affordability as major culprits.

Average annual housing supply has fallen from around 71,000 units from 1985-1996 to 43,000 units since 1997. The average living space per person in Hong Kong is 161 sq ft. This compares to 210 sq ft in Tokyo, 270 sq ft in Singapore and 300 sq ft in Shenzhen.

Studies have shown that in the 22 years since the handover, the accumulated housing shortage has reached 300,000 units and is likely to hit 500,000 units by 2028.

It takes a skilled worker 22 years to afford a 600 sq ft flat in Hong Kong, compared to a median of seven years in major international cities. Based on the land supply mechanism, it could take 11-14 years to develop a non-spade-ready site, 10 years for land reclamation and at least five years for land conversion.

Despite repeated public outcry over housing shortages, plenty of land has been sitting idle for years, primarily farmland in the New Territories. The top four developers in Hong Kong collectively own over 100 million sq ft of farmland. This could be used to build over 600,000 flats with an average size of 500 sq ft, assuming a plot ratio of three times, more than satisfying the estimated shortage of 500,000 units by 2028.

The Hong Kong government has the financial resources to develop the infrastructure. China has the know-how, having helped to build massive infrastructure projects in many countries as part of the Belt and Road Initiative. China constructs around 14-15 million flats a year, averaging 1,100 square feet in size (or the equivalent of about 30 million 500 sq ft flats). Building an additional 600,000 flats in Hong Kong would represent a meagre 2 per cent of China’s annual capacity. China can help Hong Kong to achieve this.

Why has this not been done already? Hong Kong developers blame the government for its complex compensation price negotiations, tedious planning approval processes and the long wait for supporting infrastructure. Officials criticise developers for their reluctance to work with the government to increase supply. Various interest groups also have their own agenda, so the blame game continues.

While it is encouraging to see some local property tycoons recently offering to donate farmland to the government, such timid steps could be too little, too late. Hong Kong needs bold, decisive action.

US government action during the global financial crisis may offer a helpful reference. At one stress point, on October 13, 2008, then-treasury secretary Henry Paulson called a meeting and gave a term sheet to nine systematically important financial institutions, forcing them to accept a capital injection of over US$250 billion from the government to shore up financial markets and circuit-break the downward spiral. The banks were required to sign the agreement before they could leave the room.

Could we have a similar meeting in Hong Kong? Realistically, it would face significant resistance: appeals, judicial reviews, and more appeals would ensue, and things are likely to go nowhere. So, how about a meeting in Beijing? The central government could oversee an agreement from farmland owners and developers on statutory compensation from the Hong Kong government, ensuring a healthy price margin.

Beijing could sweeten the deal by offering a land swap, using land in mainland China. Key stakeholders should not be allowed to leave until a deal is ironed out. Beijing could make this happen.

Hong Kong’s housing shortfall: why the worst is yet to come

The Hong Kong government could then sell the new public housing flats at cost or below market price to qualified Hongkongers, allowing ownership for the rest of their lives but not transferable to their heirs. This would ensure a housing supply for future generations.

Owners could be allowed to sell their flats but with most the profit returning to the government (similar to the “buy and sell” arrangement of many club debentures). The profits, basically a form of “land tax”, would become part of the government’s fiscal revenues.

Property prices have started to fall moderately in Hong Kong. Given the significant economic and social uncertainty, it is difficult to predict how much lower they will go. However, a housing market normalisation could calm the system, with prices likely to be again determined by supply and demand, as opposed to factors beyond market forces.

Who would be the winners and losers? New homebuyers would be clear winners. Ironically, developers could benefit too, boosting the value of farmland that has been sitting on their balance sheets for years and which has been valued at close to zero due to the uncertain development process. Further, attractive development opportunities in mainland China may be available as a result of the negotiation process.

One might argue that existing homeowners would be the losers. However, if the economic and social uncertainty persists, its impact on home values could be even greater than that from an increase in housing supply. Importantly, future generations would be more likely to live in a harmonious environment.

At first sight, Beijing would seem to lose out because it may need to offer land in mainland China. But this is hardly in short supply and its cost seems negligible relative to the benefits of solving Hong Kong’s structural problem and restoring its stability.

Some may feel this is a deviation from “one country, two systems”. But an extraordinary situation calls for an extraordinary response. In the absence of a better and quicker solution, we should “do what you can, with what you have, where you are”, to quote former US president Theodore Roosevelt, who has been consistently ranked among the top five greatest presidents in US history.

Many proposals have been presented to resolve the housing crisis, which is only one of the problems facing Hong Kong. But it is an important one, talked about in the community for decades. There will certainly be more challenges which require more bold moves along the way. But we need to make the first bold move now.

Sebastian Man is chairman and CEO of Chung Mei Industries. He was educated at MIT and Harvard Business School