The future of Hong Kong: “High Land Price” Policy

“High Land Price” Policy is part of the explanations of why Hong Kong Property Prices are among the most expensive in the world. High real estate prices are good as far as government revenue is concerned, but is it killing Hong Kong in some unintended ways?

Google Maps

It is really a bit of a myth to say that Hong Kong is small, because we can see only a small proportion of land which has been developed in the satellite. Of course, much of the undeveloped land are hills and rock which are not quite developable, but at least we know that “Hong Kong is small” is quite a bit of a myth. Also, urban development of Hong Kong has been very concentrated on the north side of Hong Kong Island and the Kowloon Peninsula, thus giving this illusion of very limited overall land supply even though there are still much land resources located in North New Territories.

Besides such a geographical disadvantage that limits land supply, the restricted housing supply has another deep root which was in place almost 3 decades ago. In 1984, the United Kingdom of Great Britain and Northern Ireland and the People’s Republic of China signed the Sino-British Joint Declaration, in which the British government agreed to return the sovereignty of Hong Kong back to China. In the Annex III of the declaration, it limited land sales (more formally, land leases grant) by the British-Hong Kong government to 50 hectares per year until 1997, presumably because the Chinese government feared that the British-Hong Kong government would grant all the land leases so that the Chinese-Hong Kong government after 1997 will be left with nothing. The limit was not really strictly follow, as far as I understand, but it nevertheless limited the land supply for the next decade. Hong Kong property prices have never been cheap, and the 50 hectares limits further fuelled property prices for all those years after the declaration was signed. The high land prices have allow the Hong Kong government to have the luxury of setting low tax rates, , the land policy is essentially a “high land price” policy as we know it.

Real estate tycoons were some of the main beneficiaries of this policy. The rise of Li Ka-Shing as a property tycoon, for instance, began when the 1967 riot damaged the confidence. He bought properties at knockdown prices, and as the riot ended, he made a quick buck continued his meteoric rise as the riches man of the city. The “high land price” policy, which limit supply of land, helped businessmen doing property businesses get rich. As the economy grew and population increased, there was only one way for Hong Kong property prices: UP.

Besides Hong Kong property developers, middle-class people who saved enough and bought properties in the 1980s should have all become quite wealthy now. In fact, one of the problems of this “high land price” policy is that speculating or investing in the Hong Kong property market might be better off than working hard. In fact, you would not think that you are working if you are speculating in the real estate market, but you dread going to work early in the morning. The side effect of “high land price” policy is that it encourages people to speculate rather “doing real work”, so to speak, because, at least if done correctly, you can earn a quick buck in Hong Kong real estate market without the feeling of working, while starting up a business is risky and difficult, especially in Hong Kong where you can hardly find a cheap place for a business which is in its start-up phase and hardly making any money.

Now, buying and selling properties to each other at an ever rising prices are only creating some paper gains, not genuine productive activities, and it does not create wealth for the society at large even the winners in these properties speculating games can become really rich (while losers will lose everything). Money should be channelled to businesses with growth potential which innovate and produce products and services, not to people to fund their speculation on property prices. Unfortunately, this seems to be what we have been seeing over the history of Hong Kong real estate market.

So why not change it? Because it is difficult, if not impossible, to change all at once. It is another myth in the history of Hong Kong real estate is that the “85,000” policy by Tung Chee-hwa caused the epic decline of home prices after 1997. The reality is that the housing bubble was too large in 1997, and it was destined to pop. The great supply as a result of the “85,000” policy was responsible for the prolonged depression of home prices in the subsequent 6 years, but not the cause of the bursting of bubble.

No matter which theories you agree regarding why home prices dropped 70% in Hong Kong, for the purpose of the current discussion, the message is clear enough: “high land price” policy is not good, but declining home prices have an immediate effect on Hong Kong economy. That is the precise reason why the current Hong Kong government led by Donald Tsang has been so weak in handling the public opinions on high home prices. It is easy to say that the “high land price” policy is bad, but once this policy as been in place, it is not easy for the government to revert.

The future of Hong Kong Series:

Preface
1. “High Land Price” Policy
2. Real Estate Tycoons and Monopoly
3. Complacent Chaps
4. Reduced Upward Mobility and Generation War
5. Problems of the Young Generation
6. Solutions

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.