Asia's Monte Carlo Prices Itself Out

 | Jun 23, 2016 | 8:00 AM EDT
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A View From Hong Kong

All is not well in Hong Kong.

The city has surged to the top of Mercer's list of the most expensive cities in the world for expatriates, according to data released this week. With the cost of living driven sky high by world-record property prices, the city risks becoming Asia's Monte Carlo, where the rank-and-file employees in working-class jobs can't afford to live in the city they serve. Bears who believe that will happen can short the Hong Kong market via the iShares MSCI Hong Kong ETF (EWH).

Hong Kong toppled last year's leader, Luanda in Angola, in Mercer's 2016 ranking. The African nation may seem an odd outlier, but the lack of suitable property for expats and the crowd of natural-resources executives trying to lease it has driven average rents to $6,700 per month. 

Hong Kong tops that, at $6,809 per month for a two-bedroom unfurnished apartment in a suitable neighborhood, the most expensive rent in the world. It also has the most expensive coffee, at $7.77 per cup, triple the rate in New York City. At $1.79 per liter, gasoline also costs you more in Hong Kong than any other comparable world city – although given the compact nature of the city, most expats don't need to drive.

Hong Kong imports almost all its produce, agriculture and even manufacturing, having long ago shifted production across the border into mainland China. But many Hong Kongers have absolutely no trust in Chinese food products, choosing instead to buy Brazilian chicken and Australian beef. A pint of milk, at $4.03, is streets ahead of any comparable city. That's four times the cost in New York. Only Beijing, at $3.53 per pint, comes anywhere close.

Asia used to be highly affordable, bar the exception of Tokyo, where the 1980s property boom legendarily resulted in the land under the Imperial Palace being worth more than all the real estate in California. How times have changed. Singapore sits in fourth place in Mercer's ranking, behind Luanda and Zurich, and one place ahead of the Japanese capital. With Shanghai and Beijing also in the top 10, Asia is home to half of the world's most-expensive cities. 

Actually, you can live quite cheaply in Hong Kong, where there's great food at cheap prices, and goods such as clothing – most of it made in China – won't exactly break the bank. My wife is right not to trust Chinese food products, so we're happy to pay a little more to get meat and veg we can trust.

It's the cost of a home or rental apartment that sets it apart. Hong Kong also has the most expensive office space in the world, according to CBRE, and the least-affordable residential real estate, by quite some stretch, per research from Demographia, as I noted last week. With a correction in home prices underway, the city's property developers are trading at a discount to the overall market. But residential property is down only 15% from its highs, after almost tripling since the 2008 financial crisis.

So even with some pundits predicting another 15% fall, the record prices make it virtually impossible for new graduates to afford a home. Most remain living with their parents. If the family can't afford to back them with a downpayment, many see little possibility of that situation changing.

Dissatisfaction over such issues was at least as important as the push for democracy in driving the "Umbrella Revolution" and the Occupy Central movement that shut down the city for the last quarter of 2014. A separate study by the think tank Civic Exchange showed much higher levels of dissatisfaction with the quality of life in Hong Kong, compared with people living in Shanghai or Singapore.

The data came from interviews with 1,500 residents in each place. Besides the high cost of housing, Hong Kongers are also upset over the quality of the government here, and the high cost of education and medical care.

Two-thirds of Hong Kongers say that Hong Kong is not a good place for children to grow up, compared with only 16% in Shanghai and 13% in Singapore. A shocking 42% of Hong Kong residents say they would move away from the city if they were free to choose where to live, more than double the level in either of the other two cities.

Where should they go? Southern Africa, it seems. The Namibian capital, Windhoek, is the best bargain for expats, according to Mercer. Cape Town -- which, with two oceans and Table Mountain as a backdrop tops my list of the most beautiful cities in the world -- comes next, with Johannesburg among the ranks of the five most-affordable cities for foreign employees as well. 

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