(This essay was published in Hong Kong Economic Journal on 22 October 2014.)


The youth protest movement that started on 26 September 2014 is demanding greater political freedom, but there are also obvious economic and social causes behind their action.


On one level, the youths are protesting that the present political arrangements are not sufficiently inclusive. They fear that these unfair and unequal arrangements will threaten Hong Kong’s core values, including compromising our present economic freedoms and civic liberties.


Numerous reports from journalists, social workers, teachers, church ministers, and others who have spoken to the young men and women occupying the streets have found that the divergence in fortunes between Hong Kong’s wealthy and the general public is an underlying reason for the social tensions in the city (see Gu, 2014 and Chu, 2014).


Although Hong Kong today is more prosperous than a generation ago, many middle-class residents feel squeezed. Landlords and homeowners have benefited. Property prices are at a record high, up by a third from a previous peak in 1997. Hong Kong’s retail rents are now the most expensive in the world.


But the percentage of households with private homes has increased by a mere 0.6% since 1991, from 35.3% to 35.9% today. Back then an apartment of 400 square feet in the city would on average cost $1.04 million and could be acquired with a 5% down payment. Median household income was $10,325 per month. Today a similar apartment costs $4.63 million and there is a 40% down payment requirement. Median household income is now $22,900 per month.


The down payment in 1991 was equal to 5.0 months of earnings, today it equals 80.9 months – 15 times higher and almost out of reach for the average family. Society inevitably becomes divided and the middle class no longer feels secure about its economic future. A society inevitably becomes restless when the majority of its people feel deprived.


People also see that most of the things they spend their earnings on (housing, public utilities, groceries, transportation, telecommunications, entertainment, and the like) appear to be supplied by a dozen or so corporations, many related to property development. The youths have easily embraced the radical view that tycoons dominate the economy and property developers are hegemonic. For them, society is unjust and the injustices stem ultimately from Hong Kong’s political arrangements, with Beijing as the master behind the curtains.


This radical narrative of Hong Kong capitalism, in which non-inclusive political arrangements lead to non-competitive economic markets and unjust societies, is very persuasive in Hong Kong and especially among our youths. This was not the case in the past when the general public believed in the “establishment narrative” that promised a level playing field for all and where effort will be properly rewarded.


The primary reason why our society has been divided economically and socially into “haves” and “have-nots”, however, is not the result of the political arrangements. True, these arrangements have failed miserably to tackle the growing economic and social divisions. But there are other reasons for the high property prices that are at the root of society’s divide.


First, economic globalization during 1980-2008 created an era of rapid economic growth and accumulation of wealth worldwide. The demand for all kinds of assets rose rapidly, including financial assets, property in prime locations, jewelry, art, antiques, wines, and other rare items. The emergence of shadow banking as a financial innovation was driven by the rising demand for financial assets. Property in Hong Kong was valued worldwide because the city is a prime international economic and financial center where assets and contracts are protected by the common law and a robust legal system.


Rising property prices have not been unique to Hong Kong. Thomas Piketty’s acclaimed Capital in the 21st Century finds that the ratio of housing capital to national income in industrialized economies rose dramatically from 1980 to 2010. In France it rose from 122% to 371%, in the United Kingdom from 134% to 300%, in Germany from 134% to 236%, in Canada from 121% to 208%, and the United States from 151% to 182%. In Hong Kong it rose from 122% to 209% over the period 1980-2013. (All percentages are 10-year averages.) The high regulatory cost of development contributed to rising prices in all of these places, which brings me to my next point.


Second, unlike financial assets, the supply of property is much less responsive to demand due in part to the scarcity of land in prime locations. Supplying new properties often requires redeveloping existing ones. Rigid planning rules and building codes often hamper the process of redevelopment, a pattern seen in most societies. Politics and the transactions cost of redevelopment result in long delays, pushing up property prices.


In Hong Kong, I have estimated that since 1989 such regulatory uncertainties and delays have increased the gap between property prices and construction costs by about 67% on average. The gap has persisted through both boom and bust cycles.


Third, China’s opening and economic reforms, while part of the process of economic globalization, have been an independent factor because of their enormity, rapidity, and proximity to Hong Kong. China’s opening triggered a migration and expansion of our manufacturing industries across the border. Structural economic transformation and rising prosperity created a growing demand for domestically supplied services at a time when labor markets were very tight for demographic reasons.


Prices in Hong Kong escalated rapidly and reached double digits in 1992. The process was so rapid that within two decades Hong Kong became a service economy. Property prices naturally shot through the roof. Those who failed to acquire property during this period soon discovered that prices had moved beyond their reach.


Fourth, the linked exchange rate regime tied Hong Kong’s currency to the US dollar. During most of the past three decades US interest rates have been kept low. This has fuelled property price increases in Hong Kong because international capital flowed into the city. As the share of bank loans exposed to home mortgages rose, the Hong Kong Monetary Authority began to raise the down payment ratio on fresh mortgage loans to protect the banking sector from exposure to systemic risk. This measure made the acquisition of homes even more difficult for the average household.


All these factors took place well before 1997. So the post-1997 political arrangements cannot be the cause of high property prices. The radical narrative is fundamentally wrong.  Even back in 1997, I wrote in the South China Morning Post that “Property ownership today divides society into the “haves” and “have-nots”; and the gulf that separates them appears to be ever-widening” (see Wong 1997).


Large landlords and property developers in Hong Kong have been major beneficiaries of the four factors I describe. They have become extremely capital rich and able to make major acquisitions within Hong Kong and also abroad. Thus, it is those factors that have resulted in the growing concentration of wealth, not the post-1997 political arrangements.


The creation of a tycoon dominated economy was largely an accident of the circumstances Hong Kong found itself to be in during the 1980s and 1990s. Those who started with property or were able to acquire them reaped a huge windfall gain. The non-inclusive political arrangements are being defended by the establishment in Hong Kong because of their fear of populism. Beijing on the other hand is defending it because the political opposition is stubbornly critical of China.


Rising property prices create multiple fissures in the economic and social fabric of any society. The deep divide between homeowners and renters is only one aspect of this. A young person starting life today faces a huge uphill battle to save enough for the down payment on a home without the support of a well-off parent. The generation born since the 1980s is the most affected.


The advantage of homeownership is that it provides a cheaper means for arranging finances. By borrowing against home equity, a parent can provide a better education for his children, arrange financing for starting and operating a small business, and support themselves in old age, as children become an increasingly unreliable source of funding with declining fertility rates.


Homeownership also provides a positive incentive for families to stay together when marriages come under pressure. Broken families inevitably take a toll on children.


Upward social mobility in Hong Kong today is closely connected to homeownership. Without it, Hong Kong will be increasingly saddled with problems of rising intergenerational inequality.


Unfortunately, the very high property prices we see in Hong Kong today will not go away. This creates two problems. The half of society that cannot afford to own a home complains about high prices. The other half does not want property prices to go down. Bridging the two is impossible. Even when the conflicts manifest in many different ways, high property prices are the fundamental source of division in society.


Bringing down property prices would be the wrong solution because Hong Kong’s economy would drop, too. The correct approach is to turn the “have-nots” into “haves.”


Increasing housing supply alone will not be fast enough. Fortunately for Hong Kong, there is a better way of delivering a bigger impact in one strike and at almost no cost to society: sell the existing stock of public housing to sitting tenants. The sales must take place at prices well below market levels and tenants must be allowed to have the right to transfer the unit on the free market and to keep any capital gains that arise from the sale.


More than a third of our households are living in public housing. Privatisation would provide them with a genuine asset to help in facing the many challenges in life. At one strike and at almost no cost to society, the inseparable gulf between the “haves” and “have-nots” would be significantly reduced.


Privatisation can be achieved in several ways. A modified Tenant Purchase Scheme should be revived. The amount of unpaid land premiums on our Homeownership Scheme units should be lowered. And the existing public rental housing and Homeownership Scheme should be combined into a single program allowing eligible applicants to have the option to rent, purchase, or rent now-purchase later with greater flexibility.


The problem of high property prices is only a problem because half the population in the society does not have property. If Hong Kong becomes a predominantly propertied society, then the present divisions will be removed. Even the hostility of local residents toward Mainlanders will abate.  Immigrants and visitors will be welcomed because they enhance property and capital values, not take away jobs and create congestion.


Hong Kong is a capitalist society, but when capital is so unequally distributed it becomes a political problem. The voices of those on the streets come from a generation that has grown up amidst the rising gap in the ownership of capital. Only a bold housing policy initiative can help us break out of the political rut we are in. I believe this requires the courage and mandate of a popularly elected Chief Executive. If the housing problem is not resolved, every generation in future will continue to believe that our political arrangements are at fault.




Kathy Chu, “Hong Kong Protests as Much About Dollars as Democracy,” Asian Wall Street Journal, 19 October 2014.


Wei Gu, “Protests Also Fueled by Widening Wealth Gap,” Asian Wall Street Journal, 9 October 2014.


Thomas Piketty, Capital in the Twenty First Century, Harvard, 2014


Y C R Wong, “Time to Count the Social Cost of a Divided People United,” South China Morning Post, 19 May 1997.

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