According to the Rating and Valuation Department of Hong Kong, the property indices of the city, including housing, offices and retail buildings, reached an all-time high in December 2014. A US-based consultancy, Demographia, has been giving Hong Kong the title of ‘The most unaffordable housing in the world’ for 4 consecutive years. The survey revealed that the annual median household income was HK$270,000 (US$35,000) whilst the median house price in Hong Kong was more than HK$4.02 million (US$520,000), almost 15 times the median household income.
The Government’s latest reactions
Private houses in Hong Kong have long been treated as commodity and even as somewhat of an export good. A large number of wealthy non-local investors, mostly from Mainland China, favour the vibrant property market. The overheated property market has forced the government to suspend the Capital Investment Entrants Scheme, which enabled foreigners to migrate with no less than HK$10 million of assets to Hong Kong.
In February, the Hong Kong Monetary Authority tightened the mortgage rules in order to cool off the property market. Under the new policy, the mortgages for properties worth less than HK$7 million (US$640,000) was capped at 60 per cent. For example, the down payment for a property that costs HK$5 million is HK$2 million (US$260,000), which is much higher than other cities in the world. The unaffordable property has raised public discontent, especially among the young citizens who cannot afford such expensive property price tags.
On the demand side
There is an unusual characteristic of the property market. Almost half of the private housing is purchased without a mortgage. The mortgage loan delinquency rate was low, at 0.03 percent in the fourth quarter of 2014. However, demand of private housing has remained strong. In a property sale by Asia’s wealthiest man, Li Ka-Shing, 740 flats were sold out within 1 day despite the cooling off 60 percent mortgage cap. Centa-City Index, a monthly index based on all transaction records previous months, has grown 6 percent since the beginning of the year. Moreover, there is no evidence showing the decline of the property price in the city.
Reasons for high housing prices
An important factor that brings the highest point of the property cycle is the low interest rates. The Hong Kong currency is pegged to the U.S. dollar. Therefore, the monetary policy of the city is largely captive to the U.S. monetary policy. A few studies have proved the negative correlation between the credit and property cycles. The low interest rates environment not only attracts hot money to the property market, but also encourages local resident to purchase houses.
Another critical factor is the high land premium charged on property developers. Around 50 to 60 percent of the cost of a flat go to the land premium, as the land resources of Hong Kong are controlled by the government. Until today, only around 25 percent of the land is developed. The development of unused land is extremely slow. For example, a proposal to develop a piece of land near the border of Mainland China faces strong opposition in society and is still in negotiation now. According to a research of Hong Kong Citizen Party, the high land price is directly related to the restriction of land supply.
Following the high property prices, the sale of small residential units in Hong Kong has been increasing. The size of some of the smaller units are only 40 square-feet, not much bigger than a double bed. There will be larger demand for this type of property since the government’s measures make the private housing less affordable. Property developers have identified the opportunities and started to increase the supply of small units.
However, the slowing economic growth and the anti-graft movements of China is causing a decrease on the demand side, especially for the demand of luxurious homes. On the other hand, the possible interest rates hike of the U.S Federal Reserve by the end of this year will increase the cost of mortgages. Hence, analysts are expecting a 10 to 30 percent decline in property prices this year. There is a rising concern about the housing bubble. Yet the possibility of a bubble burst caused by the interest rate hike is low. The government can loosen the previous tightening measures following the rate hike, which is usually gradual.