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The Hong Kong Housing Dilemma

 6 min read / 

“Hong Kong” and “property prices”, more often than not, are uttered in the same sentence when talking about Asia’s financial hub.

The former British colony’s housing market, while already recognised as the most unaffordable in the world for seven years in a row, continues to make record highs through the combination of investment from cash-rich mainland developers, low interest rates and a shortage of housing supply.

Earlier this year, two mainland Chinese companies outbid Hong Kong’s biggest developers for a waterfront site in Ap Lei Chau, a tiny island just south of HK island for a record HK$16.9bn (US$2.2bn).

According to Bloomberg’s estimates, it amounts to a price of HK$22100 per square foot. This is just the cost of the land – the selling price per square foot is almost certain to exceed HK$30000 when it goes to market.

Economically Unsustainable

HK housing prices are approaching their peak and economically unsustainable, said Cusson Leung, managing director at JP Morgan Chase & Co.’s Asia-Pacific equity research unit.

“Price increases have far outpaced GDP growth. Thus any external shocks could trigger tighter liquidity in the city’s banking system,” Leung says. Though the government has introduced measures to reign in the housing market by, for example, doubling the stamp duty tax from 8% to 15% for secondary and foreign home buyers in November last year, prices continued their upward march with no clear signs of slowing down in the near term.

Tax Evasion

Though the government has introduced measures to reign in the housing market, for example doubling the stamp duty tax from 8% to 15% for secondary and foreign home buyers in November last year, prices continued its upward march with no clear signs of slowing down in the near term.

Government policies are subject to enforcement and impact lag. These lags give people the opportunity to act before the new rules set in. When the Hong Kong government announced the increase in stamp duty, house prices went up rather than down because investors want to avoid paying taxes, which led to a sudden rush of demand to snap up properties before the tax hit them hard.

Hong Kong’s wealthy home buyers have found ways around these curbs and add to their already big portfolios. For example, purchasing multiple properties under one contract under their children’s name would qualify them as a first-time home buyer. Additionally, one can set up a foreign shell company that purchases the property and then buying the shell company that subjects them to only a 0.2% stamp duty since it is treated as a share transfer.

In fact, the number of first-time home buyers has increased from 30% to 70% after the tax was introduced. Since then, the government has closed the loophole such that purchasing multiple units with one contract at the same time would trigger the 15% stamp duty.

Evolution of Housing

At the most basic level, housing is shelter: it is a place where one can safely sleep at night. But housing has transcended this simple definition to being an investment class that provides an alternative to equities and bonds.

People have different reasons for investing in housing. Some want to be landlords to rent out properties for a steady income; others may want to simply diversify their portfolio of assets away from traditional investment classes.

As such, housing has become an instrument for speculative investment. In Hong Kong, even public housing is not spared because existing public housing owners can sell their units on the secondary market, albeit with some conditions, where the price is ultimately tied to prevailing market prices for private housing.

The unaffordable housing adds to the growing discontent among the youth population in Hong Kong. Based on government data, there is at least a four-year waiting list for public housing units. The government has not been able to increase supply enough to offset demand, but more importantly, the idea of using housing to speculate increases in value needs to be changed.

Solutions

If we assume the government can increase public housing supply free of political setbacks, one idea is to create separate markets between private and public housing. Under this idea, public housing units can only be resold at face value adjusted for core inflation, meaning that prices would not outpace real income, generating price stability and affordability.

Short to medium term remedies will need to contain an element which restricts speculative behaviour. Another idea is to increase the degree of illiquidity in the secondary home market, preventing speculative purchase and sale of properties.

For example, property buyers cannot list their properties for sale for at least ten years after the purchase date. This could also have an effect on the primary market because restricting flexibility in property transactions lowers the value of the property to investors because there is uncertainty on whether they can sell at the right time.

As astonishing as this may sound, much of Hong Kong’s land is undeveloped. Only 30% of HK’s total land area has been built on. In a recent interview on TVB Pearl’s ‘Straight Talk’ with host Michael Chugani, guest interviewee Mr Shih Wing-ching, the founder and CEO of Centaline Property Agency, suggests that the government has a lot of spare land available. This land could enormously increase the supply of housing since residential buildings account for only 7% of Hong Kong’s land, of which 3% is public, and 4% is private.

There is strong economic interest for the HK government to not accelerate development because land and real estate is an important source of tax revenue. In FY2016-2017, the sum of stamp duties (10.8%) and premium from land sale (22.3%) accounted for nearly a third of government revenue for the year.

With the right policies and the willingness of the government to use its resources for the right decisions, Hong Kong’s housing problems can be solved.

However, the messy state of Hong Kong politics has made progress difficult. Referring to Shih Wing-ching’s interview, he points to grim prospects that house prices will fall to a level such that ordinary citizens can afford to buy a property simply because the wealthy still demand property at current prices.

Unlike the previous housing supercycles of boom and bust such as those that followed the SARS outbreak in 2003 and the financial crisis in 2007, current prices look like they are going to stay for a while.

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Asia

Google to Open Artificial Intelligence Centre in China

 2 min read / 

Google AI China

Google will be opening its first artificial intelligence (AI) research centre in China, despite many of its services being blocked there.

Fei-Fei Li, Chief Scientist of Google Cloud, said:

“I believe AI and its benefits have no borders. Whether a breakthrough occurs in Silicon Valley, Beijing or anywhere else, it has the potential to make everyone’s life better for the entire world. As an AI first company, this is an important part of our collective mission. And we want to work with the best AI talent, wherever that talent is, to achieve it.”

The research centre will focus on basic AI research, and will consist of a team in Beijing, who will be supported by Google China’s engineering teams.

Google’s search engine and its Gmail are banned in China. However, the country has 730 million internet users, making the market too large to ignore.

Google is not the only tech giant facing restrictions in China. Facebook is also banned, while Apple’ App Store has been subject to censorship. In order to comply with government requests, Apple removed many popular messaging and virtual private network (VPN) apps from its App Store in China earlier on this year.

China has recently announced plans to develop artificial intelligence, and wants to catch up with the US. However, human rights groups are concerned by China’s use of artificial intelligence to monitor its own citizens.

Keep reading |  2 min read

Asia

Trump’s Jerusalem Declaration: What Are Its Impacts?

 8 min read / 

Trump Jerusalem

‘Therefore, I have determined that it is time to officially recognize Jerusalem as the capital of Israel.’

President Donald Trump has further instructed the State Department to begin the process of moving its embassy to Jerusalem from Tel Aviv, with Rex Tillerson also engaging other countries to join in relocating.

In yet another bombshell, the President of the United States unleashed a wave of condemnation across the world. With the obvious exception of Israel, leaders left and right have rushed in to accuse Mr Trump of exacerbating existing tensions within the region; British Prime Minister Theresa May called it ‘unhelpful in terms of prospects for peace in the region,’ and UN Secretary-General Antonio Guterres deemed it as, ‘a moment of great anxiety.’

Palestinian authorities were outraged, with calls for another intifada to take place. The response by their Arab neighbours has seemingly been in similar vein. At the time of writing, protests have already broken out, with scores of Palestinians injured in clashes with Israeli troops across the West Bank and the Gaza Strip, and one fatally shot dead as of Friday.

The Multifaceted Aspects of Trump’s Move

There are a number of dimensions to consider when examining the implications of Trump’s latest move, and to simply label it as populist policymaking would not do it justice.

In that same speech, he talked about how he was a President that was finally ‘delivering’ in the elusive search for lasting Israeli-Palestinian peace where his predecessors had seemingly failed to do so for two decades. This self-aggrandizing is not new and has been characteristic of his presidency.

Yet, it must be noted that Trump is delivering – not peace and reconciliation, but on a campaign promise he had made. Trump is a charismatic showman, but even more so a stubborn politician. This move was made against th counsel of both Rex Tillerson, his foreign secretary, and defence secretary James Mattis, in favour of keeping a promise he had made to the American Israel Public Affairs Committee back in March of 2016.

As highlighted in the New York Times, Sheldon Adelson, a pro-Israel casino billionaire, is close to Trump and donated an estimated $25m to his campaign.

In fact, Mr Adelson serves as the single largest political donor not only to the Republican Party, but between both major parties, forking out millions in both 2012 and 2016. In addition to Mr Adelson and Jewish lobbying arms are the evangelical Christian groups that made switching to Jerusalem a top priority among their influential ranks. The numbers speak: in a 2014 Pew Survey, a staggering 82% of evangelicals were of the opinion that Israel was the land given by God to the Jews, with less than half of American Jews sharing the same sentiment.

John Hagee, leader of the Christians United for Israel, spoke of how, in each meeting with Trump and his Vice President Mike Pence, the embassy’s relocation to Jerusalem was brought up. Earlier this year, Pence, speaking at the Hagee’s group’s annual summit, described how the issue of moving the embassy was not an issue of how, but of when.

Trump’s move is aided further by the aforementioned Arab neighbours. To assume that the relocation would harm relations between the US and its Arab allies would be superficial, to say the least. It should be noted that the most important group of allies – Egypt, Saudi Arabia and the United Arab Emirates – are united with Israel, and by extension the US, on a number of key issues. These include the mutual belief of Iran being the region’s most dangerous destabilizing force, along with the acknowledgement of the Muslim Brotherhood as a terrorist group.

Saudi Arabia stands as the most peculiar case. As the birthplace of Islam and the location of the two of the three holiest Islamic shrines (in Mecca and Medina), Saudi Arabia sees itself as the custodian of the religion; the de facto guardian of Muslims across the globe. However, symbolism gives way to a ruthless pragmatism, spearheaded by the ambitious Crown Prince Mohammed Bin Salman.

Bin Salman, whose recent top-down anti-corruption measures have swayed public opinion in his favour, is close to Jared Kushner, Trump’s son-in-law. Adding to that is the alleged Saudi proposal, which, as reported by the Times, would lead to Palestine accepting limited sovereignty and a total forfeiture of Jerusalem. This, in effect, draws the Saudi regime close to Israel and the most anti-Islam administration in US history.

Are Arab Countries Indifferent?

Yet the current situation serves as a further reminder that the majority of leadership in the Arab world are, admittedly, indifferent to the Palestinian grievances. It is not aided by the status of these regimes – they are mostly unelected autocratic monarchies and thus do not reflect the will of the people. Further adding to that is how the Saudis’ onslaught on Yemen has further made a farce of any genuine Arab unity. A humanitarian crisis affecting millions of (mostly Muslims) is being instigated by the self-professed protector of all Muslims.

It would be naïve to neglect the Arab populaces in this discussion. Unlike their leaders who limit Israel-Palestine to rhetoric, the common Arab continues to see Palestine as an important symbol – representing decades of oppression, betrayal, and disunity. These same feelings form the foundations for extremism to be nurtured. Trump’s move reignites Palestine as a rallying cry for Muslims, who perceive his administration as being openly at war with Muslims.

Provocative populist nationalism serves its purpose in the short run, yet in the long run, especially in a region as volatile as the Middle East, it harbours even more anti-American resentment. Couple this latest move with Trump’s proposed travel ban, and the sentiment among Muslims is justified.

Terror groups, aided by social media’s ever-increasing role, prey exactly on people who are disillusioned and disheartened. The Islamic State, it must be noted, is far from being defeated, and this latest measure acts as a gift for recruiters with which to radicalise unsuspecting young men and women.

Extremist Islamic parties will also be in ‘celebratory’ mood, with those in US ally Pakistan being of particular importance. Designated terror group Laskar-e-Taiba’s (LET) founder Hafiz Muhammad Saeed (accused of terrorist attacks in India) was recently released, and has set his eye on national elections.

Terrorist groups based in Kashmir have called upon lone wolves to attack American and Israeli embassies around the world as a result of this, with the Gaza-based Al Tawheed Brigades firing rockets at Israel. Pro-IS media group Tarjuman al-Asawirti described how the US understood only the language of bullets, car bombs, IEDs and the slitting of throats.’

Exacerbating this situation is the lack of diplomats on hand skilled enough to mitigate the fallout from this, though it must be considered that a long-term strategy hasn’t exactly been characteristic of the Trump administration, at least not in foreign policy. Fadah Pandith, former special representative to Muslim Communities at the State Department, questioned the timing of Trump’s latest move-right before Christmas-and describes how it exposed Americans to greater dangers.

The Implications of the Decision

What does this pronouncement? Just another macho publicity stunt? Detractions aside, there is a positive element in Trump’s latest decision. Formal recognition of Jerusalem as Israel’s capital by the US to Israel will put the former in a position of greater bargaining. This bargaining can include asking considerable concessions on part of the Israelis.

As for the Palestinians, this latest development, according to Emile Nakhleh, former CIA Senior Intelligence Service member, can hopefully act as a jolt for the Palestinian leadership. Hamas has proven to be an ineffective governing body, whilst the Palestinian Authority (PA) has long been mired in rampant corruption.

Their legitimacies are now being threatened and, in the face of rapid erosion, this latest move by the US can help galvanize the need to speed up peace talks, contrary to assumptions that it was the final nail in the coffin. This is the scenario desired by Trump, but it is only wishful thinking.

In the long run, however, it must be noted that nuance and compromise are central towards preventing tensions from escalating. Trump’s announcement has opened the floodgates to a number of speculations on whether there will be another intifada and, more importantly, on whether the two-state solution is still viable. The latter notion has gained traction recently, with Palestinian politicians now expressing interest in a one-state solution instead.

Conclusion

Yet this may be, again, unrealistic. Gaith al-Omari, a former adviser to the PA, states how these are empty threats, and that a two-state solution must persevere, and will continue to do so. The bottom line is that the US will still have a significant role to play in Israel-Palestine-the lingering question is how significant it will be.

Most importantly, the solution drawn must ensure that it does not leave one side gloating, and the other humiliated and disgruntled, which this latest move has clearly been unable to prevent. The Israel-Palestine conflict will continue to fester and ruin the lives of millions in the absence of compromise and understanding.

Keep reading |  8 min read

Asia

Gandhi Wins Congress Leadership

Gandhi Congress

Rahul Gandhi faced no challengers in the race to succeed his mother, Sonia, as leader of India’s Congress Party.

Gandhi is the fourth generation of India’s Nehru-Gandhi dynasty and has been destined from birth to one day head India’s Congress party. However, the 47-year-old has an uphill battle if he is ever to follow in his predecessors’ footsteps and win the Indian premiership. India’s prime minister, Narendra Modi, is the country’s most internationally visible prime minister for a generation and cemented his position earlier this year by winning various state elections. Accordingly, the relatively inexperienced Gandhi will need more than his good name to unseat Modi and his BJP.

Keep reading |  1 min read

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