Tseung Kwan O flats selling at Manhattan prices, yet Hong Kong developers’ subprime mortgage tactics go unchecked

PUBLISHED : Thursday, 26 May, 2016, 4:05pm
UPDATED : Friday, 27 May, 2016, 10:59am

In a letter to his wife Jiang Qing in 1966, Mao Zedong wrote: “Great chaos achieves great order.” Unfortunately in Hong Kong, an oppressive order among our property developers has resulted in great chaos for the rest of the population.

Complaints about property prices and rents are being countered by claims of falling prices in recent property sales. But decades of distorted government policies favouring developers, ceaseless ramping and sales manipulation have created affordability levels so high that they are unassailable.

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Realtors directed me to study the aggressive discounting in flats sold in Tseung Kwan O. Gross selling prices are about HKD11,500 per square foot. That is about US$1,500 per gross square foot. Using an efficiency rate of about 75 per cent for small flats, the price per net useable square foot is about US$2,000. This is equal to Manhattan’s current levels. This shows how absurd flat prices have become in Hong Kong despite recent discounts.

Those who can afford to live in US$2,000 per square foot apartments in New York usually earn an average annual income of about US$100,000 or more (equivalent to HKD780,000). So assuming a dual income couple, the household income is about HK$1,560,000 per year for each household, or HK$130,000 of gross income per month.

According to Hong Kong government statistics, the city’s median household income in 2015 was HK$23,500. Households earning HK$100,000 a month or greater represented only 4.7 per cent of domestic households.

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The same government data show that in 2014, 45.9 per cent of homes represented public rental and subsidised home ownership housing, and 53.5 per cent comprised private permanent housing.

Affordability will only worsen as the Nikkei Hong Kong purchasing managers’ index is predicting that the real economy would only expand by 1.5 per cent this year, down from the 2.4 per cent growth recorded in 2015. Economic growth slowed to 2.5 per cent year-on-year in the first quarter – the worst since 2012.

Hong Kong’s catastrophic home prices were created by former chief executive Donald Tsang’s pro-property developer policies that restricted public housing growth. Causing such a crisis for Hong Kong’s citizenry could almost be described as criminal, but it is certainly ethically bankrupt. So it is no surprise that he was investigated by the ICAC and charged for corruption.

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The outcome so heinous that nothing short of nationalising or expropriating land banks from the big local developers can solve the problem. For flat owners to live comfortably at their present salaries, prices should drop by half or so to about HK$6,000 per gross square foot.

That would restore quality of living. People could save enough for retirement and start their own businesses. Of course, this drastic decline could either destroy or radically reform the Hong Kong economy. It would certainly stress the banking system and create negative equity much greater than the 1998 crash. But maybe we have to destroy the city in order to save it from its excesses.

The Hong Kong government should have built more social housing like Singapore. The Tsang administration bred a situation where there are simply too many ‘have not’ citizens in Hong Kong. The cost of shelter actually hurts the productivity of the economy. Most of the economy’s capital is going to a few property developers.

The leading developers inflict us with immoral and usurious ‘top up’ mortgage schemes that raise the home loan ratio to 95 per cent in order. Anyone paying those terms for a HK$3.5 million shoe box where a room is no bigger than a single-sized mattress must be deluded of any concept of risk. That the Hong Kong Monetary Authority fails to exercise any of its sweeping powers to protect citizens from being exploited by these peddlers of toxic, subprime mortgage tactics represents a grotesque failure of governance.

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Hong Kong is mired in an unprecedented social and economic crisis. And out-of-control local capitalism breeds its own political discontent. In democracies, at least for politicians, the only thing that matters is what the voters say they want – vox populi, vox dei.

They understand that a mass political movement is powerful and to those who would oppose it, a frightening weapon. When controlled and directed by a single leader or a dire issue, it can be aimed at whomever the leader or crowds choose. In Hong Kong, that issue is the monopolised property market and the enemy are those monopolists.

Peter Guy is a financial writer and former international banker