By Alice Poon
January 2011
PDF version

It is hardly a secret that 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. 1 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. 2 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 3.

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 can pass it on to purchasers after skimming off a 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 4. 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 middle- to low-income residents solve their urgent housing 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 of 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 divided 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, especially 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, it is unrealistic to expect the government to cut the Gordian knot of its own accord, 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.

Gas Plants and Farms

Since the 1960s, leading developers have shown a knack for amassing cheap agricultural land in the New Territories. In the 1970s and 1980s, they were astute enough to acquire public utilities and service companies with large land banks (land on which gas plants, electricity plants and bus depots, for example, are accommodated). By using land designation procedures, such land can be re-designated for residential or commercial use at the discretion of the landowner upon payment of a negotiated premium to the government. This payment in theory represents the difference between the value of its existing use and the value of its modified use.

The operative word here is “negotiated”, as compared to open bidding at land auctions or tenders. By exercising careful control over the timing of initiating the procedure (say, whenever new infrastructure and public facilities become available in the vicinity, or when the property market is in a down cycle), these developers often manage to negotiate a relatively favorable price for modifying an old lease. This probably explains their ability to achieve lower average land costs than can other developers who do not own such land banks and can only acquire land via competitive bidding at public auctions or tenders. Thus whenever the government places a curb on land auctions, it affects the smaller developers adversely but not the land-rich ones. This makes even less competitive a land market already difficult to enter due to extremely high costs in the best of times.

At present, the government is the largest landowner but a few leading developers dominate the private market. As of 2009, Sun Hung Kai Properties, Hong Kong’s largest developer, owned a land bank comprising 41.9 million square feet of developable floor area and 24 million square feet (in site area) of agricultural land. In the same year, Henderson Land held 19.8 million square feet of developable floor area and 32.8 million square feet (in site area) of agricultural land. According to the 2009 annual report of Cheung Kong (Holdings), it had a land bank able to meet its development needs for five or six years.

In the last three years, lease modification premiums have brought in a significant portion of total land transaction revenue (i.e. revenue put in the Capital Works Reserve Fund – for details, please see below): 28% in fiscal 2007/2008, 53% in 2008/2009 and 59% in 2009/2010. This indicates that a few big landholders have taken advantage of the system at a time of few land auctions.

A land value tax or levy set at a high enough rate (in addition to the existing ground rent equal to 3% of ratable value) could significantly increase the carrying cost for landowners. It might well discourage further hoarding and encourage more sales. Such a tax or levy would not be unfair, as the land’s enhanced value is created by community needs (e.g. when new infrastructure is put in place or when a new town is developed) and not by efforts of the landowners. The tax would be levied annually, based on valuation according to its planned use according to current zoning plans. Since it would be collected before any lease modification takes place, it should not, arguably, be passed on to home purchasers.

Because the high land price policy stimulates land hoarding by major developers, it has been made even more egregious by the preferred economic model of two HKSAR governments that have been determined to promote infrastructure development. Both saw such construction as an important engine of economic growth and job creation. But this approach has created a vicious cycle (though for government and the property cartel, it may be virtuous) of investing money collected from land sales in building projects that boost land values. This lines the pockets of land-rich cartels and spurs them to hoard yet more land and bid up land prices at auctions.

On April 1, 1982, a Capital Works Reserve Fund (“CWRF”) was established for the purpose of financing public works projects. Since then, revenue from land transactions has been earmarked for that purpose. From 1970 to 1991, such revenue financed an average 55% of annual infrastructure investment 5.

Infrastructure as Economic Cure-all

In Chief Executive Tung Chee Hwa’s 2001 Policy Address, he boasted that the government would spend HK$400 billion (US$51.6 billion) on 1,600 infrastructure projects over the following nine years. In Donald Tsang’s 2007 Policy Address, he said, “Infrastructure development can bring about huge economic benefits. Both employment opportunities and wages will increase during the construction stage, and, upon completion, the infrastructure projects will boost economic activities and improve the living environment.” Since then, public works spending for fiscal 2008/2009 increased by 18% from the previous year, and for 2009/2010 shot up another 37%, with a projected 54% increase in 2010/2011.

For 2008/2009, CWRF funds were able to fund 83% of the year’s public works expenditure. For 2009/2010, the CWRF balance was more than enough to finance the full year’s public works program and in 2010/2011 it is expected to finance 80% of the year’s planned spending.

Typically, a public works program includes road improvements, drainage, new highways, waterworks, port and airport development, plus new towns and urban area development.

Critics have often called some of this wasteful, devoted to projects that plainly are not necessary or have questionable economic value. For example, Christine Loh and Carine Lai of the research organization Civic Exchange made this trenchant remark in their book 5: “The result of restricting land-related income for capital works in effect creates pressure to spend on physical hardware construction. With a strong lobby inside the civil service for public works, such as reclamation, highway building and other types of engineering projects, and an influential lobby outside the bureaucracy through a number of the functional constituencies, the political system favors heavy spending on bricks and mortar.”

That shows the both HKSAR governments so far have embraced an infrastructure-led economic model, tightly intertwined with their high land price policy—a policy that is in fact a legacy of colonial times.

Under colonial rule, low profits tax rates were deemed beneficial to British corporations and hence to governance. To make up any revenue shortfalls, it was decided to collect sale proceeds from selling land lease rights to the highest bidders through auctions while also exacting premiums from lease modifications and lease renewals. Unintentionally, though, the policy induced savvy developers to begin hoarding land and manipulating housing supplies to maximize their profits. Not only did this give those few developers an overbearing position in the economy, it also helped cause chronically unruly property speculation, at the expense of those with genuine housing needs.

Since the 1997 sovereignty change, both HKSAR governments have followed almost to the letter the previous fiscal model. By adopting this model, the HKSAR governments inherited the high land price policy from the colonial administrators—but not their buffer tactics such as providing adequate public rental and subsidized housing and imposing certain rent controls. Those remedies were halted in 1998.

Turning to Singapore

The first HKSAR administration, headed by Chief Executive Tung Chee Hwa, was initially oriented towards the housing model of Singapore, where the government acts as chief provider of affordable housing for all those in need—financed by large deductions from wages and salaries. But the well-meant Tung “85,000 policy” came at the worst of times, right after the 1997 Asian financial crisis hit. His policy, which would have reinstated the previous governments’ buffer tactics by releasing more land for construction of additional public and private housing over the long term, became a convenient scapegoat for a society suffering effects of the regional financial crisis. The property cartel, which vehemently opposed that policy, and disgruntled home owners who experienced negative equity after the property market buckled in 1998, were among the most vociferous critics. Since then, neither HKSAR government has wanted to hear anything even remotely critical of their sacrosanct high land price policy.

Even now, when public opinion demands price-stabilizing measures at a time of runaway residential prices, a situation made worse by investment and speculative demand coming from wealthy mainlanders, the Tsang administration has remained unmoved. For example, it refuses to resume regular land auctions, a once normal procedure that has been in abeyance since the market trough in 2002. Public opinion has claimed that replacing regular land auctions, suspended for the past eight years, by an “application list” system is a chief cause for the current housing shortage and skyrocketing property prices; this system places the timing of sales and choice of sites in the hands of developers. But there has been no official response to such opinion. Donald Tsang has also ignored strong public demand for revival of the “home ownership scheme”, a subsidized housing program dormant since 2002.

Faced by public outcry about a heavily speculative property market, the Tsang administration recently succumbed to popular pressure and imposed a stamp duty of up to 15% on properties that are resold within two years. However, the measure is not expected to affect investors who can hold real estate over the longer term, including the newly-rich buyers from the mainland. All in all, it is nothing more than a short-term palliative that has yet to prove its price-stabilizing effect.

As researcher Yu-hung Hong pointed out in his March 1999 Land Lines article, restrictions on land supply “have encouraged private land banking and property speculation, leading to high land and property prices and making Hong Kong one of the world’s most expensive cities.” He may not have foreseen that the land and tax system gridlock would scar society in such a relentless way.

Alice Poon is the author of “Land and the Ruling Class in Hong Kong”, published in Chinese in Hong Kong in July 2010. The second edition of the English version, with a new prologue, came onto the market in early December and a simplified Chinese edition was launched in late December. In the 1980s and 1990s, she worked for Sun Hung Kai Properties, Hong Kong’s largest developer, and for Kerry Properties, a mid-sized developer. 

1. Yu-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.

4. Yu-hung Hong, Land Lines Article Volume 11, No. 2 March 1999, Lincoln Institute of Land Policy

5. Christine Loh and Carine Lai, Civic Exchange, 2007, “Reflections of Leadership: Tung Chee Hwa and  Donald Tsang 1997-2007”.

Commentary  |   Timeline  |   Issues Archive  |   About Us  |   Contact Us  |   Privacy

©2005 Hong Kong Journal. All rights reserved.