Wrong Kong Part 3

Housing: A Deliberate Disaster

The cartel that controls property development in Hong Kong is at the heart of the territory’s housing debacle, an engineered crisis that fuels much of the misery driving the protests. In Hong Kong housing, free markets are only for the little people.

Itsy, bitsy, teeny, weeny …

Hong Kong has long had the smallest average apartment sizes in the world, about 480 sq ft. and about half the average in New York or London.

Hong Kongers have less than a quarter of the living space of Australians and Americans.

The city does have public housing — with almost six year waiting lists. Those apartments are even smaller. About two-thirds of the city’s 800,000 public housing rental apartments are smaller than 430 sq ft.

In a minute we’ll discuss in more detail the prices, which are soaring well beyond the means of the average buyer. In response, developers are building even smaller apartments.

Apartments of less than 430 sq ft accounted for 45 percent of all private housing supply in 2019, a drastic increase from only five percent in 2010.

Families jammed into apartments little bigger than one bedroom in most other places in the world. Clearly a crisis requiring government action to set minimum sizes?

Not according to Hong Kong’s property barons and their minions.

“Hong Kong is a free market. If the apartments become so small that no one wants to buy them, then no developers will build such apartments,” said Wong Leung-sing, senior associate director of research at Centaline Property Agency, one of Hong Kong’s biggest realtors. “There is no need to have a minimum living area set by the government,”

As we’ll see in a minute, Hong Kong developers only believe in the free market on the demand side.

Worse?

Landlords often subdivide those tiny apartments so that they can cram in more residents (and make more money). An estimated 50,000 people live in two-metre long cages stacked on top of each other for around $200 a month. Others live in plywood boxes – called “coffins” – stacked one on top of the other in subdivided apartment rooms. Shanty towns of homes with plywood walls and corrugated iron roofs are also sprouting on the tops of already over-crowded apartment buildings.

The people who live in these unregulated conditions suffer greatly. They are often bitten by bugs and mice that share their caged homes. They have high levels of respiratory disease as well as mental health problems. When fires break out, the subdivided apartments can become death traps. Over 200,000 people are on waiting lists to get out of such conditions and live in regulated public housing.

Small Space, Colossal Cost

The prices paid for Hong Kong’s claustrophobic homes are stratospheric.

For ten years, Hong Kong has had the highest property prices in the world. By far. A family in the city would need to save up for 20.8 years to afford a home in the city, according to the annual Demographia International Housing Affordability Study, which ranks 92 major markets across the world based on median affordability scores.

Vancouver came in second at a distant 11.9 while Sydney took the third place at 11. Melbourne at 9.5 and Los Angeles at 9 made up the top five most expensive housing market in the study.

Nearly half of Hong Kong apartments rent for upwards of HK$20,000 (US$2,550) a month, about 70 percent of median household income—making it also by far the world’s costliest rental market.

As housing prices continue to soar, many Hong Kong residents blame it on the influx of cash-rich mainland Chinese buyers who have so badly distorted property markets in Vancouver and Auckland. While they have had an effect on Hong Kong, it’s a smaller part of the story.

Land Supply: Calculated Shortage

Outsiders see packed cityscapes like this and dismiss Hong Kong’s housing crunch by saying it has lots of people and is an island with mountainous terrain, so there’s not much land to build on.

Wrong.

The Hong Kong government deliberately creates land supply shortages. Yes, that’s right.

In the Sino-British Joint Declaration of 1984, the agreement that governed how Britain would return to China, the amount of land that could be sold by the British colonial government for new development in one year was limited to 50 hectares. The Hong Kong government continues with that policy.

To put that in some perspective — to deal with the housing crisis in Auckland (pop. 1.6 million), the New Zealand government proposed in 2016 to make a little used 300 hectare military base available for development. The proposal was ridiculed for being a drop of water in an ocean.

Why is that limitation in the Joint Agreement? It’s a very bizarre small detail in a document governing something as big as the return of a Hong Kong to China.

Li Ka-shing wanted it there.

The effect on property prices in Hong Kong has been a boon for developers like him and a disaster for average Hong Kongers.

It also explains how the property cartel works and why the market concentration of developers is so high. It takes massive amounts of capital to win Hong Kong’s expensive land at auction. Only very deep pocketed players can bid. Small developers are almost unheard of in Hong Kong.

For example, developers recently paid HK$16.86 billion (US$2.17 billion) for a plot of residential land in Ap Lei Chau. With a total gross floor area of 762,091 sq ft, the price translates to HK$22,118 per square foot in land cost. Property agents expect apartments on the site to sell for at least HK$32,000 per square foot. That means an average Hong Kong apartment of 484 feet will sell for about HK$15 million (US $2 million.)

Why doesn’t the Hong Kong’s government change this?

It earns about 30 percent of its annual revenue from auctioning land. This is how it keep income taxes so low and capital gains taxes at zero.

Average locals I’ve spoken with don’t seem to make the connection. The average Hong Konger loves that they pay no income tax. In fact, up to 80 percent of the population pays no tax in a given year. Sounds great.

Except they’re essentially paying that tax through sky high property prices for tiny sub-standard apartments.

The tycoons love this system. In addition to paying some of the lowest tax rates in the world, they recoup the big prices they pay to win land at auctions by passing them along to their home buyers. Outside of Marxism, you’ll struggle to find a social compact more destructive than this.

Lack of Land Myth

As for the lack of usable land myth — Hong Kong has an area of 1,105 square metres, which is around the same size as New York City. After almost 175 years, Hong Kong has developed less than 30 percent of its land. Only 6.8 percent of land is used for residential and 0.3 percent for  commercial. The population now is 7.5 million.

People think Hong Kong is one of the most crowded cities in the world. At 17,311 people per square mile, it’s not even in the Top 30. It’s just the people it has are squeezed into small areas. Take a look at this map of the city at night.

About 60 percent of Hong Kong’s land is preserved as parkland or farmland. That’s right. In the most densely packed cities in the world, much of the developable land has been declared parkland.

Environmental commitment?

In a city with no official recycling plan and choking air pollution, that’s beyond laughable.

So what about the mountainous terrain myth?

From the South China Morning Post:

“The government itself says the city’s hilly terrain makes widespread development difficult.
That statement leaves architects and engineers scratching their heads. They say, if it had been true in the 1970s, it certainly is no longer today.
“It’s not an engineering problem, it’s a money problem,” said Professor K W Chau, who chairs the real estate and construction faculty at the University of Hong Kong.
“However, if you look at the money needed to make the hillside developed compared to the cost of real estate here, it’s actually quite marginal.”


If you look at the hillsides Hong Kong has already developed, you see that when there’s a profit to be made, the city’s builders find a way.

Land Hoarding

Incredibly, while on the one hand citing land shortages, the government lets developers hoard land.

This brings us back to that farmland reserve. When Hong Kong was a British colony, the concern was China could siege the territory. So producing food locally was seen as vital. Now that Hong Kong is back in Chinese hands, the city has very few farms and imports almost all its food.

However, the five giant developers all have huge banks of that now unused farmland, which they purchased at low prices. They can apply to convert the land to residential.

In her seminal book, Land and The Ruling Class in Hong Kong, Alice Poon describes the process for rezoning land from agricultural to residential as “simple”. There is no competition like public auctions or tenders. The final price is solely determined by negotiations between the developers and the government.

It’s estimated the city’s largest developers have combined farm land banks of more than 100 million square feet. While they sit on that land, the city’s housing shortage gets worse.

Official figures from the Hong Kong 2030+ study show that over the next 30 years the city will need more than 4,800 hectares of land supply. With 3,600 hectares currently allocated for planned developments, this means that Hong Kong will face a shortage of at least 1,200 hectares running up to 2046.

Then keep in mind, the government continues to allow almost half-a-million Mainland Chinese to move into Hong Kong every decade, the problem we’ll consider next.