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Reference.......
Again Lorre
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AW!
CODE 18.77
8.
As we understand it, the Hong Kong property market works on the same broad principles as any other short leasehold market, though prices tend to be higher because:
(a) there is an extreme scarcity of land;
(b)
land ownership yields high returns in an economy that is growing at Hong Kong's spectacular rate; and
(c) the local Chinese have an extreme penchant for speculation.
In these conditions it seems probable that leases of less than 15 years would be written, and could be expected to yield high returns as long as the economy was growing. Indeed it might well take longer for prices to reflect the approach of the leasehold reversion than they would elsewhere. Other things being equal, the decline in prices would be fairly orderly as the market applied an increasing discount factor to rental income as 1997 approached.
9.
In
In practice of course other things might not be equal. particular it is not impossible that there might be a purely financial collapse arising from excessive speculation. Over the past five or so years there has been a phenomenal boom in property prices both residential and commercial. Much of the buying (both direct and through takeovers) was financed on borrowed money. In 1981 the market has come off the boil. But it remains volatile and further speculation could give cause for concern, because one thing that the lease does start to affect from mid-1982 is the term of the average mortgage. As Hong Kong moves from the present standard 15-year mortgage to a 14,13, 12- year span, and so on, repayment terms will become more onerous. The risk that fingers will be burnt and confidence affected will thus increase with time, if excessive speculation continues; any fall in property prices will affect the banking system whose collateral for loans will fall. Equally, a dramatic slow-down in the economy, arising, say, from protectionist pressures in the West, could lead to financial problems.
10. It is not therefore difficult to picture a crisis in which money pours out of Hong Kong. In the circumstances the lease issue would unquestionably compound the problem of waning confidence, but it would not be the prime mover. The key to handling such a crisis would not therefore lie with a change in the lease position, though change would help and might anyway be precipitated by the crisis. Much more important would be for the Hong Kong Government to ensure that a run on the banks of the kind that took place in 1965 did not get out of hand; this might not be easy since Hong Kong has no central bank. It would also be important for the government to tailor its actions in the property market to foster stability. Auctions of Crown land are the chief source of government revenue and the government has often been accused of encouraging high property prices to boost its own income.
11. These considerations may help explain why the Governor of Hong Kong believes that it makes sense to leave the lease issue on the back burner until weakening confidence in Hong Kong forces the Chinese to talk. Moreover, the risk to British economic interests of doing so is not as great as it appears at first sight. Our direct investment in Hong Kong is less than that of the US and Japan, and tends to be held through companies which are
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