Saturday, August 30, 2014

My Article Titled "Hong Kong's Land Policy: A Recipe for Social Trouble" (Part 1 of 3)

In December 2010 I wrote an article which was published in the January 2011 issue of Hong Kong Journal, titled "Hong Kong's Land Policy: A Recipe for Social Trouble". As the Hong Kong Journal's website has since been closed, I am posting it here for record purposes.

As the article is nine pages long, I've divided it into three posts.


By Alice Poon

January 2011

It is hardly a secret that the Hong Kong billionaires who are named year after year by Forbes magazine as some of the world’s wealthiest people made their fortunes mostly from land development and property investment in the former British colony. Yet, in recent years, Hong Kong has experienced the ignominy of becoming a developed economy with the world’s widest rich-poor gap. Indeed, having some of the world’s richest tycoons residing near 1.26 million citizens (18% of the population) who live below the poverty line is nothing less than shocking. This dichotomy has in fact convinced many Hong Kong people that the roots of their many deep-seated social and economic problems may be embedded in the land and tax systems which spawned the so-called “high land price policy” – an undeclared policy that past and present governments have quietly embraced.

One result is an over-reliance on land receipts (including proceeds from land sales and lease modifications, property taxes, stamp duties, profits tax from developers etc.) as the government’s main revenue sources. When coupled with an addiction to earmarking proceeds from land sales and lease modifications specifically for infrastructure investments, it seems to have created a Gordian-knot situation for the incumbent government of the Hong Kong Special Administrative Region.

This obsession with land sales and related income sources had its origins in colonial times. The objective has been to collect the highest possible land premiums through a deliberately slow-paced program of selling land lease rights in return for upfront payments by the highest bidders at auctions and tenders, the backbone of the unstated high land price policy. This method of capturing land value was considered the most cost-efficient method by colonial governments. Between 1970 and 1996, land revenue (land premiums, annual rent, rates and property tax) accounted for, on average, 33% of annual government budgets[1]. If profits tax from development companies and taxes on mortgage portfolio profits are included, up to 45% of the government’s annual revenue was based on land[2].

The Oligopolies Prosper

However, this land policy also has been the chief contributor to the creation of property market oligopolies, enabling a few real estate behemoths to extend their preponderant power into other economic sectors over the past 30 years. Yet homebuyers have been the ones shouldering the land cost burden, which is often referred to as a “hidden tax” because developers usually are able to pass it on to the purchasers after skimming off a top layer of fat profit.

The high land price policy is regarded by many as the ultimate cause of Hong Kong’s deep-seated social conflicts, including the wide wealth gap, ever-deepening economic concentration and a disenfranchised majority of citizens who must struggle in a chronically high-cost, housing-deficient economic environment which offers dwindling business and job opportunities. Hong Kong’s economy has long been dominated by the property developers, as can be plainly deduced from their stunning profit history over the last three decades. Between 1980 and 1995, an average of 29% of Hong Kong’s gross domestic product was generated from land and property development and related financial services[3]. Hopes for diversification into a knowledge-based economy have been constantly dashed due to the entrenched land and tax systems.

In an ideal world, the logical solution would be to seek a fairer redistribution by imposing a heavier tax burden on the wealthier class (with the heaviest of all on the extremely wealthy). To reduce the government’s reliance on land-related income while achieving its redistribution goal, new levies such as capital gains, wealth and dividend taxes could be introduced. In addition, the estate duty (which shouldn’t have been but was abolished in 2005) could be reinstated and a more progressive rate could be applied to the salaries tax.

One way of dealing with land hoarding by leading developers might be to curb their appetite by introducing a heavy tax on undeveloped property—as advocated by Victorian economist Henry George—and removing artificial restrictions on land supply. The goal would be to lower the public’s expectation that land and property prices will always rise, such as by publicizing a long-term land auction timetable. To rein in the current bubbly property market and also help the middle- to low-income residents solve their urgent accommodation problems, short-term measures might be sensible solutions. These could include taxing speculative gains by means of a permanent stamp duty on short-term property trading and the re-introduction of private sector rent control measures. At the same time, the developers’ manipulation of housing supply and unscrupulous sales practices could be more stringently regulated.

The Situation Is Not Ideal

But Hong Kong is not in an ideal situation. It may even be beyond correction. Once certain interests are institutionalized, they become unyielding fixtures that even the most conscientious of governments would not be capable of weakening, much less one that is commonly viewed as in collusion with vested interests. Embodying such interests is a group of property conglomerates that wield power not only over the economy, but also over the political system. In Hong Kong, the chief executive is elected by an elite group of 800—to be expanded to 1,200 next year—who are mostly interested in preserving an unequal and unjust status quo, and has a legislature heavily influenced by members chosen by vested interest groups in what are called functional constituencies. Judging by the recent lackluster and aimless policy address by incumbent Chief Executive Donald Tsang Kam-yuen, it is apparent that no meaningful reform of the land and tax systems is likely to happen any time soon.

The problem has been compounded in recent years by a widening rift in Hong Kong society. While there may be a rough consensus about what constitutes its deep-rooted conflicts, the public seems to be more split than ever over the question of whether far-reaching reforms are desirable. The government and vested interests (including developers, property agents, property investors, speculators and most home owners) belong to the camp that is against any tampering with the prevailing land and tax systems and the resulting high land price policy. The rest of society, highlighted by those who lack housing and can’t afford to buy, do not view housing as a commodity. Meantime, the socially-conscious, post-80s generation that is disillusioned with the entrenched system, belongs to the camp that would like to shake the status quo drastically. Its ultimate goal is to see a fairer distribution of wealth and more equal opportunities for all. One source estimates the ratio of homeowners to non-homeowners in the population at about 55:45.

It is not hard to understand why profit-driven and land-rich developers and many property owners/investors/speculators insist the government should retain its high land price policy. For many in the Hong Kong community, unbridled greed is a fetish. At the same time, the low interest-rate environment (sometimes giving negative real interest rates) and its inflationary impact—resulting from the Hong Kong dollar’s 1983 peg to the U.S. dollar—has persuaded many that property is a good hedge against inflation.

In such a situation, it can be safely assumed that the present administration will continue to hide behind the excuse that society does not want another market crash like that of the late 1990s, and thus it should avoid any tampering with the market structure or land and tax systems. Therefore, expecting the government to cut the Gordian knot of its own accord is unrealistic, nor is it likely to do anything about redistributive tax reform. However, cross-generational poverty is a serious social issue that affects the young in particular, as reflected by the fact that 20% of youths live below the poverty line. This condition, when combined with discontent of the post-80s and post-90s generations whose housing needs are persistently ignored, has given society a ticking time-bomb.

Of the proposed solutions, perhaps the one advocating a punitive land value tax or levy needs elaboration. To do so, it is necessary to go a little deeper into what is called the “lease modification procedure”, by which an owner of agricultural land or public utilities/services land may apply to have the original land-use designation changed into one allowing residential or commercial use.

1Yu-hung Hong and Alven H. S. Lam, Lincoln Institute of Land Policy Working Paper November 1998 “Opportunities and Risks of Capturing Land Values under Hong Kong’s Leasehold System”.

2 Stephen Brown and Christine Loh, Civic Exchange paper June 2002 “The Political Economy of Land”.

3 See Note 1.

No comments: