Generation 40s – 四十世代

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Why Hong Kong’s property market won’t crash – this time

CommentInsight & Opinion
Andy Xie says although Hong Kong’s fragile economy remains unhealthily dependent on the property sector, the asset bubble today is unlikely to burst, as happened after the handover. Stagnation is the bigger worry


Property is at the centre of everything in Hong Kong today, much like it was 20 years ago on the eve of the handover. Soon after the handover, prices collapsed, hitting rock bottom in the spring of 2003. They have since clawed their way back up, and some. With the 20th anniversary of the handover now upon us, will history repeat itself?

The similarities between now and then are only skin deep. In 1997, Hongkongers were extremely optimistic about the future. Foreigners agreed. The mantra was that China was set for explosive growth, Hong Kong, being China’s window, would be the conduit for all the money flowing to the mainland, and Hong Kong property would rise and rise on that money. Most bubbles occur because people got carried away. Hong Kong in 1997 fell into that category.

When the Thai baht collapsed, it exposed the problems in the East Asian boom. When foreign money pulled out, the Hong Kong property market collapsed. It showed that hot money was the driver for Hong Kong’s property market, not growth.

The collapse of the bubble exposed a greater challenge facing Hong Kong’s economy. The city prospered on China being closed. Arbitraging on China’s inefficiencies was the foundation of Hong Kong’s prosperity – being in Hong Kong offered a seat on the gravy train. The Hong Kong government taxed the privilege through high property prices to fund itself.

But, after China joined the World Trade Organisation, the gravy train was derailed.

Hong Kong has never faced up to this competitive challenge. For years, mainland tourism kept the retail sector afloat. But, is the future for Hong Kong youth to be shopkeepers?

Meanwhile, investment immigration juiced up the property market. It turned a whole generation of youth into property agents harassing pedestrians in the posh shopping districts. The latest financial boom is very much driven by grey income fleeing China. After 20 years, Hong Kong’s economy hasn’t built a lasting foundation.

This economic fragility is reflected in the popular pessimism today, in contrast to the widespread optimism two decades ago. Why, then, is there a property bubble now?

Three forces have been at work.

First, after the property collapse in the late 1990s, the city’s ruling class shrank supply to prop up prices. The initial plan to launch 85,000 public flats, a key component of Tung Chee-hwa’s housing programme, was abolished. Minimum prices were assigned to subsequent land auctions, cutting supply in a low-price environment. Even the land marked for public housing was later sold to private developers. When incomes are not rising, cutting supply can increase prices.

Second, after the 2008 property collapse in the US, the Fed cut interest rates to zero and kept them there for a long time. With an exchange rate pegged to the US dollar, Hong Kong has the same interest rate, and debt demand increased accordingly. Household debt has increased to 70 per cent of gross domestic product from the previous peak of 50 per cent in 1997. The debt, of course, has piled into the property market.

Lastly, China saw a massive increase in corruption in the decade after 2002. The grey income flooded into Hong Kong, much of it enabling cash purchases of properties. The flood of mainland money, in addition to juicing up property demand, has kept Hong Kong’s interest rates even lower than America’s.

However, all three forces are now reversing. Housing supply is likely to increase substantially in the coming years. Though still low relative to the population, the increase will have a big impact, because the prices are so high relative to income. US interest rates are going up. And, China’s crackdown on corruption will last for years to come.

Hong Kong’s property market is likely to behave like Japan’s in the past two decades, not like it did itself two decades ago. The US economy is not as strong today as it was then, and US interest rates may peak at 3 per cent this time, not like the 6 per cent then. Besides, China is much bigger now and will surely intervene if the market collapses like in 1998.

After its property bubble burst in 1992, Japan’s banks didn’t foreclose on their delinquent borrowers. That prevented the snowball effect in a bubble collapse. However, while such a response would save the economy the pain of a 1998-style collapse, the slow adjustment would trap the economy in stagnation, because capital could not be relocated into new productive areas from the bubble economy.

Hong Kong has been trapped in a property curse, which could last another two decades, diverting its attention from the main challenge of meeting the competition from millions of graduates from across the border joining the workforce each year.

Two decades ago, for a similar job, a Hong Kong salary was 20 times that on the mainland. Now it is three times. How long can Hong Kong justify the differential? It is already less competitive in education and infrastructure than tier-one mainland cities. The gap will only widen. Unless big changes are made, salaries in Hong Kong will not rise and may even decline.

Andy Xie is an independent economist

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Revoke Hong Kong’s rural housing privileges so everyone can have a decent home

South China Morning Post
CommentInsight & Opinion

Mike Rowse says the favouritism shown to Hong Kong’s rural villages in terms of land allocation comes at the expense of the urban majority, and this unequal and politically unacceptable policy must change
A remark by a guest on a TV talk show has enabled me to better understand one of Hong Kong’s great mysteries: why it is so difficult to make more land available for housing. At first I thought I had misheard, or misunderstood, or he had misspoken. But confirmation came just a few days later in a different forum from an impeccable source.

The guest on Michael Chugani’s talk show was Shih Wing-ching, chairman of a free Chinese-language newspaper, but better known as the founder of one of our top property agencies. Shih said Hong Kong only set aside 7 per cent of land for residential use, of which 4 per cent was for urban housing, and 3 per cent for rural settlement. If just two of those three percentage points were switched to urban housing, which is by nature more intensive, we would have more than enough land to meet all our requirements.

“Surely that cannot be correct” would be a common first reaction. But by chance, a few days later, confirmation came at a forum on development in the New Territories, for which the Planning Department shared statistics on land utilisation in the SAR: private residential – 2.3 per cent; public residential – 1.4 per cent; rural settlement – 3.2 per cent. So Shih actually slightly understated the discrepancy.

Of course, not all that 3.2 per cent is suitable for conversion to intensive housing development; there will be small pockets in remote locations that should be ignored on practical grounds. But there is surely scope for a considerable amount to be reclassified.

A village in Sai Kung. Hong Kong has no fewer than 642 recognised villages, and 4,500 hectares of farmland, of which only around 700 hectares are actively farmed. The small-house policy is politically unsustainable. Photo: Dickson Lee

Two other extraordinary figures were shared: Hong Kong has no fewer than 642 recognised villages, and 4,500 hectares of farmland, of which only around 700 hectares are actively farmed.

The fact is Hong Kong is essentially a city. The experience of every other major city in the world – London, Paris, Tokyo, New York – shows that as they grow, they absorb the villages surrounding them. Indeed, we don’t need international comparators, as elsewhere in China we have seen the same process in Beijing, Shanghai, Chongqing ( 重慶 ) and other large conurbations. Farming also gets squeezed out to the periphery as urbanisation takes hold. Only in Hong Kong, apparently, do we have to pretend the situation prevailing in 1898 is to be preserved for all time.

By now the elephant in the room of our housing situation should be apparent for all to see. It is the small-house policy, and the fabled “rights” of our indigenous villagers. A typical small house is three storeys on 700 sq ft, or 2,100 sq ft in total. At a time when an apartment of a quarter that size in the urban area rates as a good home for a family of four, at a time when our developers are selling flats as small as 150 sq ft to give prospective buyers a first rung on the ownership ladder, this discrepancy is socially and politically unacceptable and unsustainable.

How can we stop the small-house juggernaut? The good news is that, contrary to common assertion, the Basic Law does not protect the small-house policy, and indeed those two words do not appear in it. Article 40 says, “The lawful traditional rights and interests of the indigenous inhabitants of the ‘New Territories’ shall be protected by the Hong Kong special administrative region”. This article is subject to challenge because of the different treatment meted out to men and women, which is contrary to other legislation in Hong Kong. It also runs foul of Article 25, which states, “All Hong Kong residents shall be equal before the law”.

How can it be legitimate for one group to obtain, at very low cost, a large residence whereas another similar group is expected to pay a king’s ransom for one a quarter of the size? How can it be right that one group, merely through birth, gets the equivalent of a Mark Six win, while many of our best professionals will only secure a decent property through inheritance?

We see before us a controversial effort by the government to extinguish a small group of villages occupied by non-indigenous residents at Wang Chau. What we need is a comprehensive policy to provide for the gradual extinguishment of all villages in the New Territories when the land they occupy is needed to provide decent housing for all in Hong Kong. It’s either that or reclaim our way south to the Philippines.

Mike Rowse is the CEO of Treloar Enterprises.

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Stories behind Hong Kong districts: Mei Foo Sun Chuen, where middle-class dreams began

LifestyleTravel & Leisure
Spacious, well-built and home to 80,000 people, the city’s first private housing estate, modelled on a Le Corbusier design, marked a decisive break from post-war shantytowns and overcrowded tenements

If anything marked the birth of Hong Kong’s middle class, it was Mei Foo Sun Chuen. Built between 1968 and 1978, the seaside development of 99 towers was Hong Kong’s first private housing estate, a self-contained enclave home to nearly 80,000 people.

In a city of hillside shantytowns and overcrowded tenements, it was a remarkable break from the past. The estate was clean and orderly, and the flats were spacious and well-built. There were shops, community facilities and good transport links to the rest of Hong Kong.

“The concept was new and attractive to many people – a small town providing all your daily needs and with decorated common areas for various sports or leisure activities,” says retired architect Alfred Tam Yee-shun, who moved into the estate shortly after it was built.

“I found the environment very inviting. [It was great to] be able to live in your own flat, breaking away from those tenement buildings or public housing.”

Before the housing estate, though, there was oil. American oil company Mobil built a depot on the shores of Lai Chi Kok in the 1920s. Nearly four decades later, it was still on the fringes of Kowloon’s urban area.

“The whole Cheung Sha Wan area was empty – it was all trees,” recalls artist Eddie Lui Fung-ngar, who spent his teenage summers working at the Coca-Cola bottling plant next to the oil depot. Lui still remembers the crisp taste of freshly bottled Coke. “It was so good,” he says.

Lui’s job was to perform quality control on the bottle-washing line, and he got a 30-minute break every hour, to prevent him from losing focus. Lui remembers spending time on the shore with his friends. “Next to the plant we had the Commercial Radio station, and further down you had the remains of a shipyard,” he says. “The entire waterfront was pretty run down.” He remembers it was particularly vulnerable to storms. “Even if you had a mild storm, you had fish being thrown up onto the shore.”

Things changed in 1965, when a Louisiana-born oilman named Fred Westphal came to Hong Kong. The day he arrived, the city was in the midst of a banking crisis caused by massive fraud at the Canton Trust. He later told his business partner, Sir Lawrence Kadoorie, that he was astonished to look down from his room in the Mandarin Oriental and see thousands of people lining up to cash out their savings.

That was just one of many incidents that roiled Hong Kong in the 1960s. The influx of refugees fleeing China after 1949 had provided fuel to the city’s industrial boom, but it also led to shortages of food, housing, water and electricity. Hong Kong’s hungry factories were pushing up power consumption by 20 per cent every month and the local power company, Kadoorie’s China Light and Power (CLP), could barely cope with demand.

To raise the HK$500 million needed to expand its supply, CLP partnered with Esso to build new power stations in Ho Man Tin and Tsing Yi, which made the old Mobil oil depot redundant. Westphal was in charge of building the new power stations, and he was the one who opened the door for Mei Foo’s development.

Local architecture firm Wong Tung and Partners was hired to design the new estate. It adopted a strategy pioneered by Swiss architect Le Corbusier, whose 1925 Plan Voisin called for central Paris to be demolished and replaced by evenly spaced cruciform towers with public space in between. That particular plan was never realised – people were aghast at the thought of razing Paris’s centuries-old streets – but it inspired a generation of housing projects that did away with the narrow streets and piecemeal buildings that had characterised urban growth for centuries.

Wong Tung’s plan for Mei Foo called for 99 nearly identical blocks, each 57 metres tall, connected by a massive garden podium embellished by trees, flowers and abstract modern sculptures made by Hong Kong-based Italian artist Antonio Casadei. Shops and car parks occupied the space beneath the podium.

Priced between HK$30,000 and HK$120,000, apartments were state-of-the-art, with built-in telephone and television connections, fluorescent lighting in the kitchens and bathrooms, and walls painted with a latex finish that made them easy to clean.

Compared to similar estates in Western countries, Mei Foo was much more compact. “If you line up Stuyvesant Town in New York with Mei Foo, you see a much denser packing of towers,” says architect Jason Carlow, who has studied Hong Kong’s private housing estates.

In 1976, anthropologist Sherry Rosen noted that, while Mei Foo was Hong Kong’s first overtly middle-class housing development, its social life still had more in common with old-fashioned tenements than with suburban American developments such as Levittown, with their low-density sprawl of single-family houses. That made Mei Foo a lively place, with a diverse array of shops and busy public spaces.

It left a deep impression on Guangzhou-born artist Ng Yuen-wa, who spent summers at her grandparents’ flat in the 1980s. “It was by the sea and the view was so beautiful,” she says. In the muggy afternoons, she treated herself to ice cream and wandered through the commercial arcades to the seaside promenade. The green hill of Stonecutters Island rose in the distance.

Mei Foo’s popularity made it a template for dozens of other private housing estates – and it catapulted Hong Kong’s industrial landowners into the world of property development. Shortly after Mei Foo’s completion, Swire transformed its Quarry Bay dockyards into Taikoo Shing, Hutchison Whampoa redeveloped its Hung Hom dockyards into Whampoa Garden, and Hongkong Electric converted the site of an Ap Lei Chau oil depot and power station into South Horizons.

Mei Foo also laid the groundwork for how modern Hong Kong buildings and estates are managed. “Mei Foo is the grandfather of democracy in housing communities,” says Johnnie Chan Chi-kau, CEO of Savills Services Group. Chan’s career in property management started in Mei Foo, where he also lived for several years.

When the estate first opened, an owners’ committee was established, a model that was extended throughout Hong Kong when the Building Management Ordinance was passed in 1970. For many newly minted members of the Hong Kong middle class, this was the first opportunity to have a say in how their community functioned.

Since then, middle-class Mei Foo has suffered a number of indignities. The waterfront was reclaimed in the 1990s and replaced by highways, railways and an open-air sewage treatment plant whose stench wafted over the estate during the hot summer months. Glitzy new towers now loom over Mei Foo’s decidedly modest housing blocks.

“When they reclaimed the sea, I felt very sad,” says Ng Yuen-wa. In 2003, she was commissioned by the Kowloon-Canton Railway Corporation (since merged into the MTR Corp) to paint a series of murals in the new West Rail Line’s Mei Foo station. She depicted four scenes based on the area’s history.

“The second scene was by the sea, very blue and fresh, and the last series was after reclamation – you see the sunset and the highway,” she says. “They later built up a garden that is very big, so it’s much better than it was [after reclamation], but the feeling is very different.”

And yet, despite its age and the loss of the waterfront, Mei Foo is still one of Hong Kong’s most desirable housing estates. Its flat prices are often seen as a bellwether for the local real estate market. A 1,500 sq ft, four-bedroom flat now fetches HK$14 million, a sharp increase over its original sales price of HK$120,000, even when you account for inflation. The dream of the middle class lives on, but these days, it may be just that – a dream.

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Can wasteful China walk the fine line between stability and stagnation?

CommentInsight & Opinion
Andy Xie says an inability to scale down investment and dependence on stimuli to create a perception of stability could be the real threats to China’s economy

Stability is part of China’s policy mantra: it is always emphasised at key political gatherings, like at the National People’s Congress each March. With the leadership-changing 19th Communist Party Congress coming up later this year, stability consumes all other policy objectives.

But the price for a single-minded pursuit of stability may be too high. It could morph into prolonged stagnation. Worse, the cumulative pressure could erupt one day and make stability difficult to achieve thereafter.

It is a fine line between stability and stagnation. Indeed, prolonged stability is historically associated with stagnation, especially in China. The current obsession with it reflects the traumatic experiences of China’s recent past. The economic slowdown has magnified fears of instability. But diverting so many resources to maintaining stability is itself a source of instability. Wasting resources cannot be good for long-term stability.

Sustainable stability can only be achieved by eliminating the destabilising factors. Various indicators, such as energy consumption, freight traffic and export volumes, and so on, show China’s economy has slowed by half in the past five years, after a dozen boom years.

The slowdown itself shouldn’t be a big worry. A double-digit growth rate can’t last forever. The perception of instability stems from the constant rhetoric and efforts to prop up the economy. A policy-induced uptick comes with a surge in leverage and no lasting power. China’s economy is increasingly beginning to resemble a chronically ill patient requiring constant medication.

When someone is always on medication, bystanders naturally fear a sudden turn for the worse. Spending resources to make people think otherwise doesn’t have a lasting effect. The real solution is to cure the sickness and wean the economy off its addiction to the stimulus drug.

The most important source of China’s instability is that its investment size is too big for its potential growth rate. Investment above depreciation replacement must be supported by economic growth. The faster the economic growth, the bigger the investment relative to the economy. When the potential growth rate is over 10 per cent, the investment size could be 40-50 per cent. But, when the potential growth rate is 5 per cent, the sustainable investment size needs to drop below 30 per cent. China’s inability to scale down investment is the ultimate source of its instability.

Ongoing efforts to support stability boil down to monetary support for maintaining investment. Last year, state sector investment rose by 3.4 trillion yuan (HK$3.8 trillion) or 18.7 per cent from the year before, to 29 per cent of GDP. Nominal GDP rose by 8 per cent or 5.5 trillion yuan. It is obvious whose spending led the economy.

The property bubble should be viewed in the context of financing state-sector investment, as most of the proceeds from sales in the property market go to the government.

Last year, new residential property sales rose by 33 per cent, to 15 per cent of GDP.

Fast monetary growth, the property bubble and state-sector investment have become China’s GDP trinity. When the government reports the economic performance for the past year and its target for the coming one, it is basically saying how much money it printed and will print, how much property it sold and will sell, and how much fixed investment the state sector will make. This resembles a gigantic investment stimulus programme.

The trouble with the above approach is that China’s labour market is fully employed, and overcapacity is pervasive. That is, the economy has limited and declining capacity for absorbing stimulus effectively. Stimulus always has an element of waste. With declining effectiveness, stimulus becomes more and more like total waste. Financing for the stimulus is no longer backed up by useful assets. This is what occurred in the Soviet Union during its waning years. The high inflation in the 1990s reflected its wasteful past investments. The worry of something similar happening to China is behind all the jitters.

Residential and office buildings in Beijing on January 10. Most sales proceeds in the property market go to the government. Residential property sales in China account for about 15 per cent of GDP. Photo: ReutersIn the past five years, the search for debt stimulus has focused on increasing household debt, which has risen at 20 per cent annually for the past five years and reached 100 per cent of household disposable income last year. The current level is high but could go higher. But why should the government policy be pushing people into deep indebtedness, and to what end?

The current game is essentially to load up the household sector with debt, by enticing them with speculative gains in the property market, to finance wasteful investment by the state sector.

How could this be good for stability in the long run?

China’s economic policies increasingly resemble the moves of a juggler. Anyone watching has good reason to be nervous, as the ball at the top is growing bigger. Throwing money at fostering the perception of stability doesn’t cut it; it just becomes another source of waste.

Andy Xie is an independent economist