Lois and Anthony are getting married in three short months. Currently they share an apartment in the east end, near Taikoo, but are seriously considering moving back home with her parents in order to save enough money for a flat of their own. Over the past three years, the pair have scrimped and saved — no extended vacations, no holiday gifts beyond children of close relatives, next to no dining out, few movies — to make their 30 percent down payment needs. When out of the blue they needed another 10 percent they were gutted. Lois is a nurse; Anthony is in mid-level bank management. These are hardly people that shouldn’t be able to afford a modest home. “We’re not overly ambitious. We don’t need a deluxe $15 million luxury penthouse somewhere,” says Lois, sounding frustrated and very close to resigned. “We just want a decent two-bedroom flat and be able to take a vacation every year.”
Fantasy vs. Reality
Affordability has been on the radar for months now — years if you talk to people like Lois and Anthony — but it’s only recently been considered a real “issue.” One of the points keeping anyone from admitting Hong Kong is at an affordability crossroads is an inability to define it. For decades now, accountants, financial advisors, tax specialists, property experts and your parents have all clung to the 30 percent rule: No more than 30 percent of your income should be spent on rent or a mortgage (no more than 50 percent for all debt). For entry-level professionals earning $20,000 per month, that totals $6,000. Anyone making that salary would defy you to find a flat at that price level fit for human habitation. That people do live unfit flats is another story altogether.
“Soaring prices result in deteriorating affordability. As the affordability of housing has become a growing issue, homebuyers have to compromise with smaller flats. Therefore, demand for small-to-medium sized flats will remain strong in 2015,” said Colliers International’s Manager of Research & Advisory, Joanne Lee in a January forecast. Needless to say, she was right, and prices on those small to medium-sized flats have risen 7 percent so far this year according to Knight Frank and are expected to continue climbing, possibly another 5 to 10 percent. Still, Knight Frank doesn’t see a serious problem yet. “[The] affordability ratio in Hong Kong is now at around 80 percent. If mortgage rates [are] lifted by 100 bps and 200 bps, monthly mortgage repayments will increase only 10 percent and 20 percent respectively. Therefore, we estimate that a mortgage-rate rise of less than 200 bps will not bring significant impact on Hong Kong’s residential market.” Perhaps not to the market.
With interest rates so low, it seems to go against common sense for homes to be so out of reach. The Monetary Authority has made no secret that high down payment requirements among other financial policies are designed to protect the banks, not serve residents seeking homes. What that’s really done has kept most potential owners with respectable incomes stuck in the rental market — a market that is among the most expensive in the world — and unable to accumulate the kind of cash needed for that very down payment. “Between us our rent is under $20,000 and our budget is $5 million, so with two incomes it hasn’t been that hard to cut out some perks and save up,” explains Lois. “But we’ve had our emergencies and sudden expenses like anyone else so it took longer than we planned. But of course, our rent has gone up each year, which eats at savings, and property prices have gone up too, which means more saving. I don’t know what I’d do if I was trying to do this on my own.”
No one will go on the record yet, but more cooling measures to bring prices under control — and increase affordability — could be in the cards if prices don’t stabilise or drop a bit soon. And the government’s favourite salve, increasing supply, is unlikely to help. As Ian Brownlee theorised in the SCMP in March, “Studies indicate that affordability in Hong Kong’s housing market is not determined by supply. They show that, over the past 20 years, there has been no correlation between the number of units provided and the price of housing. Price is consistently high regardless of supply.” That opinion was backed up just weeks later when the government’s own Central Policy Unit submitted a report demonstrating exactly that, at great length.
So what’s the solution? Is one needed? Are we looking at the issue the wrong way?? “There are different measures of affordability of course. Some look at the affordability of mortgages compared with average incomes. Because interest rates are low, by this measure Hong Kong homes are still easily within reach,” argues Savills’ Head of Research and Consultancy Services Simon Smith. “Another measure simply looks at house prices as a multiple of income and by this yardstick current valuations look challenging.” There’s always a financial crisis or return of SARS to hope for. That might help.