Real Estate

Property Prices Pose Biggest Risk to Stability of Hong Kong Economy

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Just three months after HongKong rolled out a tough new round of property cooling measures,home prices have again climbed to record highs with demandunusually strong for new flats over the normally quiet Lunar NewYear holiday break.

Hong Kong officials have stressed repeatedly that reining inthe city's property market, now one of the world's mostexpensive, is a policy priority to restore affordability and tomitigate a major threat to the economy of the affluent Asianfinancial hub.

After five previous rounds of efforts to curb prices sinceOctober 2009, including a 15 percent property tax on foreignbuyers, mortgage restrictions and quick resale taxes, thehome-price juggernaut rolls on and the challenge remainsenormous.

"The overheating property market remains the biggest riskfactor to the stability of the Hong Kong economy," said NormanChan, head of the Hong Kong Monetary Authority, the city's defacto central bank, who also said household debt was now at 59percent, close to a record high of 60 percent in 2002.

Property prices per square foot now exceed HK$10,000($1,300) even in drab, unglamorous districts such as TaikooShing on Hong Kong Island, where thousands of 700 square-footunits sell for more than $1 million apiece, more than a largecottage in Provence, France, a 2,700 square-foot bungalow inHawaii, or a 1,300 square-foot flat on Manhattan's Upper WestSide.

With affordability reduced in a city with a monthly medianhousehold income of about HK$20,000 and one of the widest wealthgaps in Asia, anxiety has grown among its 7 million residents.

(Read More: Hong Kong Property Cubs Have Some 'Unintended' Victims)

That anxiety however, didn't stop buyers flocking to newlybuilt units at Sun Hung Kai Properties' Residence 88in a far-flung district close to the border with China, snappingup 150 of the 352 units over three days at an average price ofsome HK$8,000 per square foot.

"Sun Hung Kai was testing the market," said propertyresearch analyst Wong Leung-sing with Centaline Property."People still want to buy flats. The desire is strong. Theydon't think the market will fall."

The upcoming annual budget presentation by Hong Kong'sfinancial secretary could however, see a fresh round of marketcurbs that would likely face opposition from Hong Kong'spowerful big five developers.

Together these giants - Cheung Kong, Sun Hung Kai Properties, Henderson LandDevelopment, New World Development and Sino Land - control around 90percent of new property sales.

Hong Kong's embattled leader, Chief Executive LeungChun-ying, has pledged to raise the land supply for housing inthe medium to long term that should provide 175,000 public unitsin the coming decade and boost private sector units. Demandhowever, continues to outstrip short-term supply.

The Centa-City Leading Index, a widely used indicator of thecity's residential price trends, is now at a record 121.7, 5percent higher than the same period in mid-January.

Tycoon Trouble

A sub-index of Hong Kong property stocks thatincludes bellwethers Cheung Kong and Sun Hung Kai, has gained 9percent since the last cooling measures announced on Oct. 26,beating an 8 percent rise in the benchmark Hang Seng Index.

With substantial land banks and lack of competition, thesedevelopers have huge leverage over a government that is keen toencourage a swifter rollout of new flats and which could offerincentives to convert and rezone land for residential use.

Henderson's billionaire owner, Lee Shau-kee, who expects a 5to 10 percent price rise this year, recently called on thegovernment to waive expensive land premiums for agriculturalland to allow the construction of HK$1 million flats.

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Hong Kong's leader recently hinted, however, that he may bemore inclined to take on the property tycoons whose wealthsurged last year as they saw their rankings rise on the Forbesglobal billionaires list.

"In recent years, our urban development has taken adisturbing turn. All too often, there are wrangles over land useand infrastructure projects, leading to sluggish landdevelopment and housing shortages," Hong Kong's Leung saidduring his policy address in January. "In cases of marketfailure, the government must take appropriate action to addressthe problem," he said.

"Masses Can't Afford It"

Although property prices remain stubbornly high, newmortgage applications fell 30 percent in December from November,leading once-bullish analysts like Nomura's Paul Louie to turncautious.

"Our property market and economy have just become veryimbalanced and everything is just catered towards the top 1percent...the masses really can't afford it," said Louie. "Weexpect property prices to stall, with only a mid-single digitrise over the next two years."

With more than 200,000 people currently on waiting lists for subsidized public housing, droves have downsized or moved intofactory buildings, sub-divided "slaughtered" flats that canaccommodate multiple families, or moved into "cage homes",wire-mesh hutches stacked on top of each other in crowded rooms.

For the likes of Wong Chi-ho, the solution to the housingproblem lay in skirting the law. He moved into a cheap factoryspace despite the risk of eviction by officials who ban suchusage on fire-safety grounds.

"What it says is that Hong Kong property is so ridiculouslyoverpriced and overexpensive, that it's pushing people of modestmeans to do illegal things like this," said Wong, who has seenhalf his building fill up with similar tenants.

Flats, meanwhile, have been growing smaller as developerstry to preserve margins and a semblance of affordability.

(Read More: Priced Out of Hong Kong Homes? Try Hotel Living)

With more than half private dwellings now measuring lessthan 538 square feet, a cottage self-storage industry hasmushroomed across Hong Kong, with industrial warehouses diced upinto labyrinthine storage cubicles to cater for people whoselives have spilled beyond the walls of tiny homes.

"We've seen more and more people using storage basically aseveryday part of their lives," said Matt Chun, a director of SCStorage, the city's biggest self-storage chain with 47 sites.

"It's a home away from home for some people...Personally, doI wish that people have to live like that? No, I don't thinkanybody deserves to live like (that). But it is what it is."

For many regular Hong Kongers, there are no easy answers.

"We don't even have enough money for food...but thegovernment has hardly done anything to fix the market," saidMichelle Wong, a single mother raising her baby daughter in adamp, 80 square-foot sub-divided flat with a ruptured sewagepipe that she rents for HK$3,000 per month.

Unable to afford anything else, she's been waiting threeyears for a public housing unit.

"It's a very poor life that I lead."