Hong Kong Rewards the Property Oligarchs

Hong Kong is supposed to have an open economy and be governed by rational economic policies. The reality has progressively become very different, not least in the past two years. This has seen swingeing taxes on many real estate transactions in a supposed effort to halt rising housing prices, now about the highest in the world relative to incomes.

The actual result has been a spectacular failure. Prices have continued to rise but market activity has fallen by an extraordinary 80 percent. This may seem a contradiction. Price booms are usually accompanied by feverish activity. But in this case the explanation is simple. Normally in Hong Kong, as in other mature economies, activity in the market for homes is concentrated in the large secondary rather than in the new-build market. Completions are running at 15,000 a year or little more than 1 percent of the private housing stock.

But the new taxes are a huge discouragement to trading, hence a large part of drastically reduced trading is focused on the primary market. The buyers here are mostly those local people wealthy, desperate or confident enough of ever-rising values to bid up prices, or mainlanders who are as much concerned with getting their money out of China and the yuan as with getting value for their money.

The net result is yet another bonanza for the small group of mega rich, politically connected developers who control about 80 percent of new private supply. They are always winners even if government does not directly intend that. They have been allowed to acquire such a grip that they can adapt to any change in policy.

The latest price distortion adds just another perversity to a system which affects the economy in multiple ways and creates Hong Kong’s appalling wealth and income gaps.

The story starts with the supposed shortage of development land. For years this was held down by the government as it sought to benefit the big developers, and its own revenues, from land sales by keeping a very tight lid on supply. That has now been eased but still the government claims there is not enough available to sell. Meanwhile members of the pro-government Heung Yee Kuk, a feudal group representing so-called “indigenous villagers,” controls much of the land in the New Territories, even though they represent only a small proportion of the current population of the area. They do almost as they please regardless of the law and turn huge areas of supposed agricultural land into junkyards. They are also given rein to waste land by building small houses they sell or rent for huge profits.

The other land issue revolves around the big developers. They sit on huge acreages, or land banks, estimated to be capable of housing two million people, in order to keep a tight rein on land supply and force prices ever upwards. The government is complicit in both these root causes of land shortage. The Heung Yee Kuk provides political support for the government and the big developers keep officials and hangers-on rewarded with sinecures to retiring civil servants and compliant professionals, and jobs for their children.

The next culprit is another racket that deprives most of the population of the revenue fruits of capital revenue – mostly land sales and development rights. All such revenue must go to the Capital Works Reserve Fund, not into general revenue. The result: massive overspending on capital works, many of which are not needed and most of which run far over budget. But they are a huge benefit for contractors, many of which are owned by the very same developers who dominate private housing, utilities, supermarkets, etc. While pouring concrete for infrastructure proceeds at an ever faster pace, despite low population growth, spending languishes on the environment and other aspects of an up-to-date city.

Hong Kong’s domestic economy is one of the most monopoly-ridden in the developed world yet its economy gets top marks from foreign ignoramuses such as the US-based Heritage Foundation who proclaim it to be the freest.

The grotesque nature of the system was recently showed up yet again by the government budget, unveiled last week. The surplus for the year ending March 2017 is estimated at an extraordinary HK$93 billion. Some HK$50 billion of this is the result of a boom in capital revenue, totalling HK$151 billion or HK$50 billion more than budgeted. But another HK$50 billion was from higher revenue and large underspending of its operating budget.

One result: stooped old ladies of 80 collect cardboard to supplement tiny old age allowances, cages continue to be homes for thousands, and hospital overcrowding gets worse by the year – even while GDP per head continues to rise, at least according to official figures, by 2-3 percent a year.

To reduce the projected surplus for 2017-18, the government is making cuts in salaries tax and property rates. But yet again most of the benefit goes not to the 70 percent in the low and low-middle income groups but grossly pampered upper middle income groups, which will doubtless help more of them to hire underpaid Filipino helpers to drive their children to government-subsidised elite schools.

As for the huge sums accruing to the Capital Works Reserve Fund, instead of being wasted on boondoggles they should, together with some HK$1.5 trillion of combined accumulated surpluses, be used to fund a modest but predictable pension system. But that would not suit the bureaucracy and its big business pals.

It may seem shocking that Donald Tsang, the former Chief Executive of Hong Kong, has just been sentenced to jail for “misconduct in public office.” His former number two is already in jail for much more serious corruption offences. The current chief executive, Leung Chun-ying, is the subject of curiously delayed investigation into payments he received just prior to taking up the office.

But at one level it is merely a reflection of the huge pecuniary advantages that a government decision, especially on development issues, can bestow and the small-circle of power and wealth holders. On another it raises concerns about the politics behind who to prosecute. Thus prosecutions may seem the result of a well-functioning investigative judicial system. But a closer look may also show a selectivity which is as disturbing as the crimes themselves. This is not the Philippines or Malaysia yet. But politicisation of the justice system is clearly in the ascendant.