Top of the market?

Many of the street names in Hong Kong are a legacy from the colonial era. Some tell the stories of the territory’s earlier geography as well.

Ferry Street and Bonham Strand are nowhere near the harbour, as their names suggest, with both roads landlocked and far from the waterfront.

Bonham Strand, running parallel to Queen’s Road in the central business district, was created by one of the earliest reclamation projects in the 1850s. As the colony’s population exploded, the British repeatedly reclaimed land from the sea. By 1997 – when sovereignty was returned to China – up to a quarter of Hong Kong’s built-up areas (including the international airport) were formerly under water.

Living space has always been a thorny issue for Hongkongers. According to the annual Demographia International Housing Affordability Survey, Hong Kong has been crowned as the world’s most unaffordable city (for property) for eight years in a row. And in an effort to boost land supply and take some of the steam out of real estate prices the Hong Kong government has just proposed its biggest ever reclamation project. It is now planning to invest at least HK$500 billion ($64 billion) in 1,700 hectares of artificial island, an area that equates to about a fifth the size of Hong Kong Island.

Is this the best way forward for the territory? And does a softer outlook for prices in the world’s most expensive city indicate that its property market has reached a tipping point?

Too expensive to live in?

According to Demographia’s study, the price of an average home in Hong Kong, at HK$6.2 million, is now 19.4 times median household income, the highest level since the survey began in 2005. (A similar survey by a local university in 2002 put the ratio then at 4.7 times.)

That means it will take nearly 20 years for an average Hong Kong family to afford an apartment in the city – assuming that they save the entirety of their salaries.

For comparison, the median multiple for second-placed Sydney stands at 12.9.

Data compiled by local property agent Centaline indicate the average home price has more than tripled in Hong Kong over the past 10 years. The cost of an “average” home has long been deemed crazy by outsiders and even local buyers are showing signs of strain.

As home prices have climbed higher, the city’s real estate developers – among the world’s biggest in terms of stock market value – are responding by offering units of ever smaller sizes. Hongkongers initially described these tiny apartments as “mosquito flats” but more recently they have been calling them “nano units”. Bloomberg reported in June last year that a 161 square-foot apartment – a size that could barely house a Tesla Model X – was sold for nearly HK$4 million. With that kind of money, the South China Morning Post calculated, you could buy a 17th century French chateau over 300 times the size.

However, nano unit buyers are ‘lucky’ enough to buy their own homes, albeit tiny ones. Many more have no chance of getting on the housing ladder and live in squalid rentals. At the shocking end of the scale: nearly 210,000 people in Hong Kong are surviving in so-called “coffin homes”, or purpose-built plywood cubicles and bunk beds crammed into small apartments averaging no more than 100 square feet in size.

That is not a sensationalist media estimate either; it comes from the government’s latest census report.

The average waiting time for cheaper, subsidised public rental housing, the government also admitted this week, has climbed to a 19-year high of 5.5 years, which is considerably longer than its policy goal of a three year wait.

So what’s being done to tackle the housing crisis?

Editorial writers at local newspapers have pointed out that what is re-markable is that there are so few signs of social unrest despite the fact that many Hongkongers are living in housing conditions that even the United Nations have deemed “an insult to human dignity”.

Hong Kong has also been named by the Heritage Foundation as the world’s freest economy for 24 consecutive years. Staying true to this tradition, the government has been reluctant to introduce homebuying bans for non-locals, but relied instead on taxation to dissuade overseas investors. Since 2010, the authorities have implemented several new or amended stamp duties on property transactions. As a result non-locals have to pay much higher taxes when buying an apartment. A vacancy tax on unsold new homes was also introduced in June to prevent property developers from hoarding.

In the longer run, the government has come to the conclusion that the root of the problem is the chronic shortage of land. There has been much debate as to why it has taken so long for the government and its town planners to come to this conclusion. Nevertheless, it now seems prepared to act.

A task force on land supply was set up late last year to explore options to boost land supply. It has since launched a five-month consultation period to gauge the public’s views on 18 different ways to dramatically increase land supply. One approach is a public-private partnership (PPP) that develops fallow farmland in the New Territories near the northern border with mainland China (more on this later). Other ideas include near-shore reclamation, the digging of underground caverns, the rezoning of a container terminal area for residential use, and the development of parts of Hong Kong’s extensive country parks.

Last but not least, some have proposed the conversion of private sport clubs, including Hong Kong’s most exclusive golf course, into public rental housing (see WiC405).

Each of these options has its own proponents and its own critics. The question is which of them could be gamechangers for the world’s most expensive real estate market. And given that so much is at stake, the current stakeholders clearly want to swing the debate in their own favour.

Take the biggest four property developers. They have amassed nearly 1,000 hectares of agricultural land at minimal cost since the 1970s (Henderson Land owns about half that total). The big payday they have been waiting for would arrive should the government opt for the PPP approach and rezone this hoard of agricultural sites into residential usage.

In another scenario CK Hutchison, owned by Hong Kong’s richest man Li Ka-shing, will profit if it is allowed to turn its massive container terminal into a new town.

Not surprisingly how best to boost supply has been a hot topic in Hong Kong for months. The lengthy public consultation process is designed to allow the interest groups to come to some kind of consensus. The task force is scheduled to submit its final report to the government next month.

More land reclamation too?

Hong Kong’s first chief executive Tung Chee-hwa was keen to address the city’s real estate conundrum. He also focused on increasing supply. But his critics argued that Tung’s policy target of building 85,000 housing units a year led to a six-year, 65% slump in home prices after the 1997 handover.

More recently Tung set up a policy think tank called the Our Hong Kong Foundation. One of its most vocal pleas is for an ambitious reclamation project and it seems to have swung current chief executive Carrie Lam’s thinking.

Last month during her annual policy address, Lam said her administration would push for a massive reclamation project off Lantau, Hong Kong’s largest island.

The “East Lantau Metropolis” (ELM) will provide up to 400,000 residential units (Hong Kong has about two million households) and house more than a million people. The project is likely to cost at least HK$500 billion but its residents won’t move in till 2035 at the earliest. All the same, for policymakers the plan for 1,700 hectares of construction space is a silver bullet: a previous government study estimated that Hong Kong’s land supply needs to grow by 1,600 hectares between 2030 and 2046.

In fact, a number of Hong Kong’s most densely populated districts, such as Sha Tin, Tai Po and Tsuen Wan bear a resemblance to the “satellite town” concept proposed in the ELM plan. All three of those areas were developed by the British administration in the 1970s to remedy a shortfall in housing in the period. Back then the colonial government had to compensate the large number of villagers that had to make way for the new developments. Sometimes the government had to take over the land from owners who were reluctant to move.

(The Land Resumption Ordinance still supports compulsory purchase of private land for “public purpose” and some observers have suggested this route for the property firms’ hoards in rural areas, although the government has concerns that the move could in-voke a lengthy judicial review and tarnish Hong Kong’s free market halo.)

Creating a new town on an artificial island is more straightforward in this regard, at least. Nor is the idea that original: Gordon Wu, the boss of developer Hopewell and a long-time advocate of Hong Kong’s integration into the Pearl River Delta (see WiC427), flaunted a similar idea in the 1980s.

Wu has now thrown his backing behind Lam’s vision for a new Lantau metropolis too, although he also believes the plan is far too conservative.

He has since suggested the government should go for a reclamation project as big as 3,000 hectares in surface area, housing more of the predicted increase in the city’s population. “Many young people cannot afford to buy flats amid soaring property prices, and a substantial amount of land is held by a few property developers,” Wu told South China Morning Post.

What’s the response to the Lantau reclamation plan?

What might have been regarded as a a crowd-pleaser for potential homeowners has already run into heavy political resistance.

To begin with, critics have accused Lam of pre-empting the taskforce on land supply, rendering its lengthy public consultation process as pointless.

“There is no such thing as an absolute consensus over whatever issue,” Lam said in defence of her decision. “For an urgent issue, we would be irresponsible if we waited until there is an absolute consensus before we act.”

Opponents have also pointed to the financial feasibility of the plan, raising concerns that the costs of construction could burn through much of Hong Kong’s fiscal reserves.

Other mega infrastructure projects in the city have cost a lot more than anticipated, such as the construction of the bullet train service now linking Hong Kong to Guangzhou and Shenzhen, which was plagued by delays and ran massively over-budget. The fear is that the ELM would incur similar problems, with large amounts of money ‘thrown into the sea’.

Also vocal in their opposition are environmental groups, concerned that the massive reclamation will endanger marine life in local waters. Others says the whole idea of creating a new island is stupid at a time when climate change will push up sea levels.

Could the plan trigger a property market correction?

Many campaigners for more land supply in the city don’t see the ELM as the best way ahead. Instead they favour the public-private-partnership plans in the New Territories as a better way forward. But one of the major bottlenecks for boosting available land has been a very bureaucratic town planning process. A rezoning exercise for a single site can easily take more than a decade to get approval from all the different government bodies.

The ELM plan – which could take at least 30 years to complete – is going to take even longer than that to deliver new homes for locals. But the bigger impact today is that it could alter “the expectations on future land supply”.

According to Shih Wing-ching, founder of leading local estate agent Centaline, the change in context would prompt developers to monetise more of their current land reserves before house prices start to go down in anticipation of the Lantau gamechanger. That might make it easier too for the government to negotiate a better deal with the big four developers when they are talking to them about taking the PPP approach and rezoning their holdings from farmland.

“Once the reclamation plan is ironed out, the developers have to change their strategy and they won’t hoard land reserves any more,” Shih told Hong Kong Com-mercial Daily. “Hong Kong’s housing supply would increase and home prices would go down before the reclamation project is completed.”

Already there are a few signals that point to a correction in the market. The 15-year bull run that began in 2003 (save for a brief hiccup in 2008) may even have finally run its course. Most notably, the government cancelled a land sale for a plot near Victoria Peak, Hong Kong’s most expensive residential district, last month. It was said to have asked for a minimum price of HK$32 billion for the plot. But with only five interested developers and none offering a bid deemed high enough, the government called off the auction.

According to Apple Daily, the secondary market has also shown signs of turning in recent months, with transaction volumes starting to dry up. Indeed property market sentiment took a further blow in September when the major Hong Kong banks raised their prime lending rate for the first time since 2006.

Analysts are turning more bearish in their outlook too. Jones Lang LaSalle, for one, said on Wednesday that it expects home prices to drop 15% by the end of next year, and possibly by as much as 25% if China’s trade row with the United States worsens. Further rises in interest rates won’t help either – and these look more likely given that Hong Kong’s currency regime requires that borrowing costs stay reasonably aligned with monetary policy from the hiking US Fed.

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