Hong Kong-The World’s Most Expensive Property Market

We’re No.1! According to new research in urban planning consultancy Demographia’s International Housing Affordability Survey, for the seventh year running Hong Kong rates as the most unaffordable housing market in the world for the middle class.

Demographia’s data states the median price of a home in the SAR in 2016 was over 18 times the median gross household income, not factoring in possible interest rate increases. What does it all mean?

Stating the obvious

The 18.1 median multiple does represent an improvement from 2015’s 19. “This improvement is a positive development. However, much greater improvement in housing affordability is needed. In 2010, Hong Kong’s median multiple was 11.4. Hong Kong’s median multiple of 18.1 represents a substantial deterioration in its housing affordability. The UBS Global Real Estate Bubble Index rates Hong Kong as having the world’s sixth worst housing bubble risk,” the survey said.

Demographia’s metric is based on the median home price divided by the median household income, a common formula for urban market evaluations also used by the World Bank and the United Nations.

By its measure, rounding out the top 10 were Sydney, Vancouver, Auckland, San Jose, Melbourne, Honolulu, Los Angeles, San Francisco, Bournemouth and Dorset. Conspicuous by their absences were New York, London and Tokyo.

Demographia is pro-car, anti-transit economist Wendell Cox’s conservative consultancy, so its motives may be suspect for some, but the research confirms a suspicion.

“If the question is, is this a very expensive place to live and one of the most unaffordable places in the world, then absolutely,” reasons Jonathan Gordon, IP Global’s distribution director.

“But I think data like that is skewed because if you look at how people earn, like most places you have 3% or 4% earning most of the salaries and the rest on fairly modest or average incomes.

“So I think from that perspective then yes, if you’re looking at the price of a property compared to what people earn, and what they need to put down.

“These days, given the cooling measures that are in place you’ve got to put down increasingly large deposits, which frankly is out of reach for many people.

“So I think combined with the fact that liquidity is not there for a lot of borrowers and first-time borrowers that need it, makes it very hard. I would agree, and [that research] is proving a point.”

In his January policy address, outgoing chief executive CY Leung wrestled with housing supply yet again, and promised that 94,000 new flats were on track for 2020.

Things are so desperate the government approved plans for its environmental offices to begin explorations of what areas of the country parks could potentially be developed with minimal ecological damage. Prices during his administration have skyrocketed almost 40% and are currently just shy of the September 2015 peaks.

No second options

“The fact of the matter is that there’s not enough supply of affordable units. You’ve got an oligopoly in Hong Kong, with four or five developers that basically control the market and they tend to switch the supply off when they need to and switch it on when they can,” Gordon says.

“Right now we’ve got a 20-year low in terms of secondary transactions and a 20-year high in terms of primary market transactions. So the market’s become polarised. The reason that’s happening is because in light of the fact that there’s very little lending available to normal people with normal jobs and normal salaries, those who are buying for the first time are typically bankrolled by developers.”

Full financing through finance companies partnered with developers is possible, and many are also willing to waive the 15% stamp duty secondary purchases are now required to pay.

“People in the secondary market can’t do that, and it explains why that market has ground to a halt.”

That lack of a strong secondary sector is a weakness for Hong Kong’s market overall.

According to data from Knight Frank, in 2007, primary sales accounted for 16% of all transactions. By 2016, that number had spiked to 31%.

Joseph Tsang, managing director and head of capital markets at JLL, argues: “All these cooling measures … yes, they ‘cool’ the market for a short period before it picks up again.

“But from the perspective of helping young buyers for example, it doesn’t do anything. It just makes the second-hand market more difficult to sell … it leaves a huge hole in the market where the middle class should be. It’s a tumour that, in my opinion, is getting bigger and bigger and one day it’s going to be huge problem.”

Nonetheless, there is an argument that Hong Kong’s caution is protecting it from severe shocks, and that those in the market for a home are well-positioned to weather any storms – storms such as interest rate hikes.

By Knight Frank’s calculations, a rate increase as high as 200 basis points bringing rates to 4.5% would add $5,000 to a $6 million flat’s monthly mortgage payment negotiated at 80% LTV. That may relegate many aspiring homeowners to the rental pool, but those who meet affordability demands are relatively insulated. That said, those who can afford that $6 million is a relatively small 17% of taxpayers, and just 8% for $15 million flats.

Despite the 90,000 flats on the way and a 10-year high 25,000 housing starts in 2016, will the lingering affordability issue have any influence on policy?

“I think they [policymakers] are going to stick to their track of death by a thousand cuts to cool the market down, which they’re doing despite the action the developers are taking,” Gordon says.

“But can they massively increase the supply of units in a short period of time? No, they can’t.”

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