13 August 2018 - Whether you’re talking price-per-square-foot or affordability, Hong Kong is known as one of the most expensive housing markets worldwide. According to a recent report by the UBS Global Real Estate Bubble Index, you’ll need 20 years of income to purchase a home in Hong Kong—compared to 16 years in London, and 11 years in Singapore and New York for a similarly-sized flat.
Data from the Ratings and Valuation Department may have shown Hong Kong home prices rising for 27 months straight in July, but nobody bats an eye anymore—why not?
It’s often said that the greatest demand from Hong Kong housing comes from China. But, according to the Hong Kong Monetary Authority, purchases by non-Hong Kong residents make up only 5 percent of all purchases, which means the impact of China is minimal. On the other hand, the huge divergence in price appreciation between smaller (<40 sqm) and larger (>160 sqm) properties point to the local demand that has been driving prices up. While numbers from the Census and Statistic Department show 65 percent of homeowners have fully paid their mortgages, we often hear stories about parents remortgaging their properties to subsidize their children’s property purchases. Whatever the story, local demand is there.
Supply, however, is always tight. Statistics show that the overall vacancy rates in Hong Kong are usually on the lower side, at 4 percent. According to the latest report by the Transport and Housing Bureau, new housing supply in the past two consecutive quarters has dropped to 93,000 units. This figure might continue to fall due to the government's new housing policy and vacancy tax. Under the new policy, developers may face mounting pressure to accelerate the sales of the completed units in the short term, but, in the mid-to-long run, developers might also slow down the pace of construction projects to reduce costs.
As Hong Kong’s interest rates generally track that of the United States, when the 1997 Asian financial crisis hit, interest rates were about 8 percent in the US, and 9 percent in Hong Kong. Despite declining interest rates in the following seven years, Hong Kong home prices fell, but have been growing since 2004. We know from history that any change in interest rate takes a while to implement, and the first phase of rate increase signals a recovering economy. Hong Kong’s interest rates, which, as at 31 July, stood at 2.15 percent, are a long way from overheating levels of 6 to 7 percent—or, when the cost of borrowing becomes unaffordable. On top of that, mortgage payment-to-income ratio now stands at 46 percent—still well below the 30-year average of about 60 percent.
A steady growth in demand and limited new supply, plus low-interest rates and a relatively low mortgage payment-to-income ratio support current housing prices. And, if prices fall dramatically, it’ll be due to exogenous factors, such as the outcome of the US-China trade war and heightened military conflict in the region.