(Bloomberg) -- Hong Kong’s real estate slump is choking off one of the financial hub’s most important sources of government revenue.
For decades, the city’s government generated massive income from auctioning off land to cash-rich developers as prices soared. That helped enable Hong Kong’s low-tax system, which has been crucial to its business hub status. The arrangement largely worked — until recently.
A protracted property downturn is now undermining the model. Falling home prices and rising office vacancies over the past few years have caused developers to either stop bidding for sites, or offer exceptionally low prices for plots in public tenders. In a sign of how depressed the market remains, an index of Hong Kong home prices sank to a nearly eight-year low in July.
Hong Kong’s government’s revenue from land in its 2023-2024 fiscal year was the lowest since the global financial crisis, and demand isn’t expected to return to levels seen during the real estate sector’s heyday. The stark slowdown is piling pressure on Hong Kong to increase its income from other sources. The city has committed to build a large technology hub and has other expensive projects in the works that could drain its coffers. It also has a rapidly aging population that will require more spending on welfare services.
At the height of the property frenzy, the city collected HK$164.8 billion ($21 billion) from land. Total real estate related revenue contributed close to one-third of Hong Kong’s government revenue that year — the highest on record going back to 1989 — according to an analysis by Charles Ka Yui Leung, an economics professor at the City University of Hong Kong, and other academics.
In the recently ended fiscal year, the government’s total revenue from land dropped to just HK$19.6 billion. That was 77% below the official budget estimate for 2023-24. In the current fiscal year that ends on March 31, 2025, the government has estimated total land revenue of HK$33 billion.
Leung said Hong Kong’s real estate slump and population decline are signs of deep-rooted problems in the economy. Demand for housing is falling as more people emigrate overseas, choose to live in neighboring Shenzhen, or stop investing in property because they expect it to fall in value.
The era of the city’s reliance on land sales for income has passed, and “if the government doesn’t think about its expenditure and continues this way, we will face even bigger problems,” he added.
A drastic move by Hong Kong’s government to scrap property buying curbs earlier this year resulted in only a short-lived rebound. Sales have slowed and prices for new and second-hand homes have continued to decline.
“The land sales market is expected to remain subdued throughout 2025 and 2026 due to low developer confidence, high inventory levels, and a high interest rate environment,” said Hannah Jeong, a surveyor. The city’s developers are under pressure to cut prices to sell new homes, while facing high financing costs and construction expenses, she added.
Fewer Tenders
In the last fiscal year, Hong Kong’s government sold only three sites for HK$7.3 billion, the least since the 2008-2009 year. A plot in the Kai Tak area — once a popular location for developers — was sold at the lowest price in nine years last September. The city also experienced a record number of failed land tenders.
So far this year, the government has sold one residential site and two plots for electric vehicle charging station use for a total of HK$722 million. It also failed to sell a residential site in late July after receiving only one bid that didn’t meet its reserve price.
An unprecedented and deepening commercial property downturn is adding to the challenges. Hong Kong’s office vacancy rate hit a historic high of 16.9% in the first half of the year, while rental prices are expected to fall as much as 10% in 2024, according to CBRE Group Inc.
Commercial sites used to bring in billions of dollars for the government during the peak of the market a few years ago. The city hasn’t put up any commercial land for sale since March 2023.
Fiscal Deficits
Hong Kong’s government had a budget deficit of about HK$100 billion for the fiscal year that ended in March 2024, almost double its earlier estimate — mainly because of the significant shortfall in land-related revenue.
The city has now had four deficits in five years, resulting in a slump in fiscal reserves from the peak of HK$1.2 trillion in January 2019 to HK$615 billion by the end of June. The pattern is unusual, as Hong Kong’s government is constitutionally obligated to try to balance its budget and avoid deficits by keeping its spending within its revenue limits.
Government expenditure is only going to rise. More than one-third of Hong Kong’s population will be 65 or older by 2046, up from 21% in 2021. On top of the likely increase in welfare spending, the city is building a HK$220 billion mega project called the Northern Metropolis, which would turn part of the New Territories into a tech hub. It is also planning to build three large artificial islands that are expected to cost HK$580 billion.
In response to a query from Bloomberg News, a government spokesperson said the city is trying to increase revenue and is putting a bigger emphasis on trying to control expenditure growth. That includes capping the size of its civil service and reviewing major subsidy programs — such as discounted public transport fares for the elderly and disabled.
More Debt
The government is also considering alternative financing options such as public-private partnerships, and will issue more bonds to help pay for its projects. It is expecting to issue close to HK$95.8 billion in debt this year, the highest amount in at least 25 years, and issue as much as HK$135 billion in bonds annually through the 2028-29 fiscal year.
“Raising debts doesn’t help with the structural deficit in the long run,” said Ryan Ip, vice president at Our Hong Kong Foundation, a think tank. The administration has to look for ways to cut spending, and develop new industries so that the economy isn’t dependent on real estate. “But this takes time to build up,” he added.
To be sure, Hong Kong’s financial position is still better than most other developed economies. The ratio of government debt to the city’s gross domestic product will be between 9% and 13% in the next four years, the government estimates. In comparison, the US’s national debt was 123% of its GDP in 2023.
The city can’t easily raise income taxes, because its simple and low-tax system has been one of the financial hub’s biggest draw for businesses, expatriates and foreign investment. Earlier this year, the government raised the tax rate for high earners to 16% from 15%, affecting only 0.6% of the tax-paying population.
“If the tax rate is too complicated, Hong Kong’s advantages are lost,” said Gary Ng, a senior economist at Natixis SA. “Simply put, it’s hard for Hong Kong to get rid of land finance.”
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