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Hong Kong: Home Sweet Home? Not These Days (int'l edition)
Property owners are hurting, and it could affect the economy

Call it the revolt of the haves. On a recent Sunday in Hong Kong, 2,000 angry homeowners took to the streets to march against property prices--not because they're too high, but because they're too low. Typical of the demonstrators is Bob Yung. Four years ago, at the peak of Hong Kong's property bubble, he bought a 420-square-foot apartment for $192,000. He has since watched it lose half its value. ''We want the government to take care of owners and to make decisions to raise housing prices,'' says Yung, who then proceeded to contradict himself by chanting: ''Protect our property! Free Market! No intervention!''

Yung may be mixing his messages, but that shows just how turbulent the Hong Kong property market has become since prices peaked shortly after the city's handover to China in 1997. Homeowners are frustrated that while the economy has rebounded at a 14.3% growth rate in the first quarter, the property market has languished. To top it off, the government is proceeding with long-standing plans to provide 50,000 subsidized apartments a year, through both sales and rentals. The goal is to raise homeownership from 50% of all households to 70%. Critics say this will further depress prices. They argue that since private flats have become more affordable, the government should stop subsidizing housing altogether.

Despite its reputation as the most open economy in Asia, Hong Kong has one of the most interventionist housing policies in the world. The government is the sole supplier of undeveloped land, and it houses 50% of the population. It has been building massive public-housing estates since the 1950s, first to absorb refugees from China and later to give Hong Kong residents a crack at owning their own homes.

The protests underscore another point: Despite the buzz about a brave high-tech future, Hong Kong's fortunes remain tied to the vagaries of the real estate market. A further drop in property prices could erode confidence. The 250,000 small and medium-size businesses that provide jobs for 80% of the workforce rely heavily on real estate as collateral for bank funding. The government also derives more than half of its revenues from property and related activities. Finally, about 40% of local bank loans are tied to real estate. ''The lack of confidence could have a domino effect on the rest of the economy,'' says W.K. Leung, a business professor at Hong Kong University.

True, Hong Kong is enjoying an economic rebound after the crisis, thanks to strong exports. But depressed property prices are dampening consumer spending. Much of the surge in retail sales comes from tourists, whose arrivals were up 13% in the first quarter. The 1.2 million Hong Kongers who own private flats account for 85% of all income earned, and they're staying away from stores as they feel their purchasing power hit by the property slump. Many now live in flats worth less than their outstanding mortgages. The property meltdown has had other effects. Many of the city's unemployed, now 5.1% of the workforce, once held real estate-related jobs as construction workers, decorators, and, of course, property agents.

BIG SHADOW. When Tung Chee-hwa became Hong Kong's chief executive in 1997, he inherited a property bubble from the previous administration: The British did nothing to dampen real estate speculation, fearful of hurting sentiment before the handover to China. Prices shot up sixfold from 1990 to 1997. Three years later, the price collapse makes subsidized housing virtually redundant. Morgan Stanley Dean Witter notes that a family earning up to $3,600 a month qualifies for a subsidized apartment, yet a Hong Konger needs income of just $2,500 a month to afford a mortgage on an entry-level private flat.

By sticking to his 70% homeownership target, Tung is pushing onto the market homes that no one wants to buy: Many of the apartments are of substandard construction in undesirable neighborhoods with inferior schools.

It's a mess. ''People are starting to realize that property is not going to be the automatic route to riches that it was in the '80s and '90s,'' says David Dodwell, co-author of the widely read book The Hong Kong Advantage. Somehow, the city has to lessen its dependence on property by generating new sources of wealth. Until it does, real estate woes will bedevil its politics and cast a shadow over its economy.

By Robin Ajello and Frederik Balfour in Hong Kong

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Hong Kong: Home Sweet Home? Not These Days (int'l edition)

CHART: Hong Kong's Tanking Real Estate Market

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