Hong Kong's Polarizing Fortunes

In a recent post blogger Doctorfat (肥醫生@西九龍貧民區) described the plight of many Hong Kong young couples in the face of a heated property market (both sales and rental) and an inflationary environment. According to him, many are spending more than a third or even half of their income on housing mortgage payment. The post also pointed out that property prices have shot up so fast in the last few months as a result of a series of interest rate cuts that they have now surpassed the peak level of 1997, exhibiting all the symptoms of another bubble in the making. Flats in some new projects in Kowloon and the New Territories are asking for HK$8,000 a square foot, he said, and these are all called luxury apartments.

If a well educated young professional plans to get married and wants to buy a new flat in Kowloon or the New Territories, he would have to mull over his would-be shelter cost: a 750 square feet apartment would cost him HK$6,000,000 at today’s market price. By the time he finishes with his mortgage payments after 20 years, he will probably have paid about HK$9,000,000 for his flat, with about HK$3,000,000 of that going to the banks as mortgage interest (@ 6% p.a.), provided he does not default. This is assuming he can afford the 30 percent down payment (HK$1,800,000) now and that interest rates stay at the current low level for the next 20 years.

To be able to afford such a flat (with a monthly mortgage payment of HK$30,000), the young family would have to have a monthly household income of at least HK$60,000 for the duration of the mortgage with no hiccups. According to Census and Statistics Department, in 2006, the median monthly household income in Hong Kong stood at HK$17,250, which was slightly lower than ten years before (1996 - HK$17,500). Only 8.3 percent earned HK$60,000 per month or above. It goes without saying that a HK$6,000,000 flat is a luxury in the real sense of the word that the vast majority can ill afford.

Where does the original price of HK$6,000,000 go? At least half goes into government’s coffers as land premium (which the developer has already paid to government for the land but afterwards gets reimbursed from the sales proceeds upon sale of flats), half or more of the remaining half gets pocketed by the developer as development profit, and the remainder goes to contractors (most likely the developer’s subsidiaries) as construction cost and to banks as interest cost if applicable.

Hang Lung Properties, the fourth largest developer in Hong Kong, has just reported that its interim net profit tripled the previous year’s. Such laudable result owes mainly to the company’s “holding” strategy (i.e. letting properties lie dormant for several years). One can be quite certain that such a practice is not uncommon among its peers. More often than not, it is such deliberate measure, amongst others, that creates an artificially tight supply condition in the residential market with the inevitable effect of pushing prices up. Of course, the artificially tight land market as a direct result of the land system and government’s land policy is a separate but attributable issue, which subject is explained in great detail in the book “Land and the Ruling Class in Hong Kong”.

If Hang Lung’s interim result seems impressive, what kind of annual profit has the largest property developer been making? Just a quick look at Sun Hung Kai Properties’ website would give the answer. It registered a 50 percent jump in net profit for 2005 over the previous year and has recorded an average annual net profit of HK$9 billion for the five years to 2007. This is after raking in HK$9.5 billion per year on average in the preceding decade. In short, one single developer (it is not alone) has been able to heap on obscene piles of cash, quite risk-free due to the high land price policy embraced by government and not by means of any innovation of its own, to the tune of HK$140 billion in the past 15 years. Is this any surprise? No, because the entrenched property cartel is aided and abetted by a pandering government through its outdated and unfair land and taxation policy.

Is the SAR government about to change the status quo? Not a chance. If one just looks at the upcoming budget, in which one would see how significant a role land revenues play in its fiscal management (they always have), one would never entertain such a thought. To derive so effortlessly such kind of lavish revenue from a scarce natural resource is too tempting an option not to succumb to. Besides, the prospect of landing lucrative post-retirement jobs with property conglomerates for senior officials would give the latter all the more reason to ensure that nothing is done to rock the boat.

But if one starts to contrast the welfare of an average household with the fortune of just one developer conglomerate, particularly when 20 percent of Hong Kong people live below the poverty line while the Kwok brothers are said to be worth some HK$117 billion (not to mention the net worth of Li Ka-Shing and Lee Shau-Kee), it would be impossible not to ponder that something is seriously wrong with the institutionalized systems. The ordinary citizens are likely to be trapped within these with no redress until drastic political reforms are initiated.