Is there a Housing Bubble in Hong Kong?

The domestic property price indice for Hong Kong has tripled since 2009, according to latest data from the Rating and Valuation Department of HKSAR. With continue skyrocketing property prices for domestic, office, retail and flatted factories, there has been controversies about whether a bubble exist in the Hong Kong property market.

Price Indices for Hong Kong Property Market, Rating and Valuation Department, HKSAR

What is a Housing Bubble?

A housing bubble occurs when the price of real estate raises above their fundamental economic value. It could be driven by an increase in demand, speculation and by investors’ psychology. A housing bubble usually begins with an increase in demand and limited supply, as housing supply takes a relatively long period to replenish and eventually causes an increase in property price. Speculators enter the housing market in hopes of earning a high return, which further pushes demand upward and increases property price. When demand decreases, supply increases or external shocks happen, the bubble burst and property price realign or could fall below their fundamental economic values.

Is there a Housing Bubble in Hong Kong?

The Hong Kong Monetary Authority usually examines six factors – the real property price, the transaction volume, the confirmor transaction volume, the buy-rent gap,  the income leverage and the number real new mortgages to evaluate whether a housing bubble exist.

1. Real Property Price: Average property price in Hong Kong cost 18.8 times more than the annual median income, according to the Demographia International Housing Affordability Survey.  It is also ranked as the world’s most unaffordable urban city to buy a house in for the seventh year in a row. The continue increase in property price seems to indicate the existence of a bubble.

2. Transaction Volume: Transaction volume has been increasing. According to the latest statistics from the Land Registry, the number of sale and purchase agreements of residential and non-residential building units has increased by 141% comparing to March last year.

Year-on-year Rate of Change in the Number of Sale and Purchase Agreements, The Land Registry, HKSAR

3. Confirmor Transaction: Confirmor transaction is a unique feature of the Hong Kong property market. The confirmor enters a preliminary sell and repurchase agreement and they will negotiate a long closing date for the contact. The confirmor will contract another buyer, the sub-purchaser, to sell the property to at a higher price before the closing date of the contract. Confirmor transactions is an useful indicator for the extend of speculative activities. The stamp duty on residential property is targeted towards the reduction of such speculative transactions.

4. Buy-Rent Gap: The buy-rent gap compares the cost of mortgage payment to the cost of renting it. If mortgage repayment is higher than rent, it suggests it is cheaper to rent than purchase a property. According to the Hong Kong Monetary Authority March 2017 Half-Yearly Monetary & Financial Stability Report, the buy rent gap has widened to a recent high of 161.6%.

Buy-Rent Gap, HKMA

5. Income Leverage: The income leverage ratio, also known as the income-gearing ratio, compares the mortgage repayment to household income. It measures the affordability of housing, how much income is used to settle the debt. According to the Hong Kong Monetary Authority March 2017 Half-Yearly Monetary & Financial Stability Report, the income-gearing ratio has climbed to 72.0%, which is much higher than the long-term average of about 50%.

Indicators of Housing Affordability, HKMA

6. Real New Mortgages: New mortgage refers to new loans for private residential properties. The number of real new mortgage usually goes hand-in-hand with real property price.

In a nutshell, the Hong Kong Monetary Authority said the outlook for the Hong Kong residential property market remains uncertain. The still-low mortgage rate, stable economy, job and income condition, pent-up demand and incentives offered by property developers would continue to cause demand to increase. However, the increase in stamp duty, the increase in US interest rate and the steady increase in housing supply may eventually cause housing price to decrease. It is also to note that the current countercyclical macro-prudential measures introduced by the Hong Kong Monetary Authority since 2009 has safeguarded banks’ resilience by controlling household’s leverage. With the average new loan-to-value ratio decreasing from 64% to 50.1% in January 2017.

On the other hand, Cusson Leung, the head of Hong Kong research at investment bank JPMorgan, said Hong Kong housing price are close to their peak in an interview. Factors such as the home-price growth has outpaced GDP growth, the fact that when looking at the price-to-income ratio, an average flat price in Hong Kong causes 15 to 18 times more than the average household median income, all indicates the property market is frothy. However, Leung expresses he cannot see immediate factors that will cause the bubble to pop. A bubble would not necessary burst unless triggered by external events. But he warns there are more downside risk than upside ones at this time of the property market.

–  END

[Return to PART I]

35 Years to Buy a House, Is This Okay?




Writers: Yoan Jin Soul Lee, Tsz Yan Cindy Ko

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