Tuesday, Dec. 03, 2002

Hong Kong's Long Fall

By ILYA GARGER/Hong Kong

Hong Kong, that busy capitalist corner of China, has always weathered hard times with the mantra: "What goes down must come up." After half a decade of economic decline, this faith is starting to fray. The prime reason is the city's real-estate market, which has been in free fall since the Asian economic crisis and handover jitters burst a seven-year property bubble.

Since then Hong Kong has been in denial, sputtering along while waiting for the good times to return. In 2003, after an ill-conceived government policy to prop up the real-estate market fails to deliver, the city will finally have to confront the painful reality that the property bust reflects: its golden age, when it made easy money as the gateway to China, is over.

Hong Kong property prices are down two-thirds from their 1997 peak, and 70,000 households — about 3% of the city's total — are saddled with mortgage debt greater than their property's value. Unemployment is at a near record high of 7.2% (compared to a 1997 low of 2.2%), and deflation looms. No wonder: the sagging real-estate and construction sectors account for 14% of Hong Kong's gdp.

The government announced in late 2002 that starting next January it would try to boost confidence by freezing its own sales of empty plots through the end of 2003, and indefinitely halting construction of subsidized flats. This will boost developers next year, but won't create more than a hiccup in the market's overall decline. "The reality is that the government can't do that much about property prices," says Paul Coughlin of Standard & Poor's in Hong Kong.

Even with a continued slide, prices remain steep. A well-located 120-sq-m apartment now goes for $1 million — comparable to lower Manhattan and twice as much as the equivalent in Shanghai or Beijing — and retail space is pricier than in London or Tokyo. Most observers estimate the property market has another 10-20% to fall before bottoming out. Some of this will take place in 2003, but the low point will probably come the following year.