Hong Kong: A Mad Stampede For Real Estate
With less than six months until Hong Kong reverts to Chinese control, one might expect investors to be heading for the exits. Instead, they're flocking to real estate brokers. A new apartment development went on the market in early January--and 27,000 people lined up to vie for 1,600 flats. In November, a single-family house on prestigious Victoria Peak sold for a record $70 million.
Behind the speculative frenzy is an economic fact of life that is unlikely to change this July: Hong Kong's scarcity of good housing is getting worse. In the past decade, the population has surged by 16%, to 6.3 million, a level government planners hadn't expected the territory to reach till 2010. Developers also underestimated demand and have been slow to release new housing. As a result, Salomon Brothers Hong Kong Ltd. estimates, property prices rose an average 30% last year and are passing the previous peak levels of 1994, making Hong Kong residential property the world's most expensive. The market's strength was also reflected in the 34.5% rise in 1996 of the Hang Seng Index, which is dominated by property companies.
Coming so close to the handover, the property boom amounts to a resounding vote of confidence in Hong Kong's economic future. While there are legitimate fears that Beijing will trample Hong Kong's political freedoms, investors are betting it will remain a thriving financial and trading hub for Greater China. The boom also indicates that while most well-to-do Hong Kong residents have secured foreign passports just in case, for now they plan to stay put: There are few better places to make money.
Even so, there is concern that the market is overheating. In addition to locals who simply want to move into better apartments, speculators from China, Indonesia, and Singapore are also getting into the action. A four-bedroom apartment in the stylish Dynasty Court complex in Hong Kong's Mid-Levels district recently sold for $6.6 million.
There's even a feverish trade in the right to stand in line. One prospective buyer is rumored to have paid a staggering $776,000 in December merely for a ticket that entitled him to get first pick at a swank new complex on Hong Kong Island's picturesque southern coast, where houses fetch up to $10 million. Says Salomon property analyst Michael Green: "We've never seen anything like that before."
JITTERS. The rush is making financial regulators nervous. For one thing, there are signs that speculation is spreading from luxury flats to less expensive property, putting home ownership further out of reach for the middle class. What's more, the market is vulnerable to swings in U.S. interest rates, since the local currency is pegged to the American dollar. Mortgages at Hongkong & Shanghai Banking Corp. have dropped as much as 150 basis points in the past year, to 8.25%, largely because of the fall in U.S. rates. A sharp hike in U.S. rates, therefore, could clobber Hong Kong's property market. Regulators worry that the banks' reliance on property loans for more than 40% of their portfolios makes them vulnerable to any big downturn. So they are urging banks to be cautious about new mortgages.
There are political perils as well. The big worry is that the bubble will burst just as Beijing takes over, triggering a broader loss of confidence. Both Governor Chris Patten and C. H. Tung, who is to become Hong Kong's chief executive on July 1, have tried to cool the market by publicly warning that prices are rising too rapidly. Officials also hint they could hit speculators with a 16.5% profit tax.
But such short-term measures cannot resolve the gap between supply and demand. The colonial government was more concerned about a possible meltdown than a boom, so it made little new land available for residential development. Property companies, who wanted to keep prices high, have put fewer than 30,000 new units on the market annually for the past decade, and just 19,000 in 1996, a 22-year low. David Faulkner, a partner in property consultancy Brooke Hillier Parker, estimates Hong Kong needs 35,000 new units annually. One reason officials have hesitated to increase supply, he contends, is that "they haven't understood the problem" of scarcity.
Such policies may change after the handover. Tung says he wants to free up more residential land. But it will be several years before that translates into more apartments. As a result, property prices could prove to be as big a political headache as pro-democracy activists in the first years of Chinese rule.