Hong Kong’s property pain may soon get real

Henderson Land Development Co

13/12/2023 12:03

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Thomas Shum
       HONG KONG, Dec 13 (Reuters Breakingviews) - Hong Kong’s
leader is talking tough on illegal structures ubiquitous in the
city’s luxury houses. That ought to please Chinese President Xi
Jinping and the public at large who both see intolerable
inequities in the residential market. It raises the pressure to
act on the issue and it means property prices in the financial
hub could fall a lot further.
    A bigger apartment is one of the things Hong Kongers most
desire, Xi noted in a speech last year marking the 25th
anniversary of Chinese rule in the city. Yet while secondary
home prices have slumped more than 20% below a 2021 peak, a
modest 600-square foot apartment in Shatin – the city’s most
populous district – still costs close to 19 times the median
annual income.
    Lee appears to be rolling up his sleeves and preparing to
tackle the problem. He says he intends to prosecute those who
have built illegal structures and is, according to Bloomberg,
considering a citywide survey of houses built on slopes.
Torrential rainfall in September led to a landslide on Redhill
Peninsula, exposing multiple unauthorised basements excavated
beneath the foundations of several houses.
    A serious crackdown would first hurt the wealthy. Many areas
like Redhill are popular simply because cavernous basements are
easily built in cliff-side mansions: a zero-tolerance approach
would cause luxury apartments to sink in value. Yet negative
price movements could cascade to drag down the broader market
too.
    It will be a high-risk move for authorities. Overall, the
number of property transactions this year are on track to end
below 2022 figures, which represented a historic low not seen
since 2013. Developers Sun Hung Kai  0086.HK , CK Asset
 1113.HK  and Henderson Land Development  0012.HK  have offered
steep discounts for new apartments in recent months as sentiment
dips. Hong Kong’s government typically generates 20% of annual
revenue from stamp duties and it has been running on a deficit
since the pandemic. That financial contribution helps to explain
why previous administrations have mostly brushed aside the
issue, including after a notorious scandal in 2012 involving a
top political candidate.
    Yet Xi’s effort to curb speculation in the property market
on the mainland also makes it harder for Lee to do nothing in
Hong Kong, not least too because Chinese officials appear to
blame inequality as one of the sources for the social unrest in
the city in 2019. Lee also may face less local resistance than
in the past as the influence of Hong Kong’s tycoon landlords is
waning. Change will be disruptive but the imperative to act is
growing.
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    CONTEXT NEWS
    Hong Kong’s Chief Executive John Lee said in his annual
policy address on Oct. 25 that next year the city would propose
lowering the prosecution threshold as well as raising penalties
relating to illegal residential structures.
    On Sept. 12, Lee said that the government will prosecute
homeowners at Redhill Peninsula, a luxury housing estate, after
a landslide below several townhouses drew attention to possible
illegal excavation.
    The administration is considering a citywide survey of
houses built on slopes to identify further violations, Bloomberg
reported on Dec. 6 citing unnamed sources.
    Unauthorised building works involve any additions or
alterations made to the interior or exterior of a property
without prior approval of the Building Authority.

 (Editing by Una Galani and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
click on  SHUM/ 
thomas.shum@thomsonreuters.com; Reuters Messaging:
thomas.shum.thomsonreuters.com@reuters.net))