19 December 2018

Runaway property markets in HK, London — what next?

By Vey Wong

Hong Kong is the most difficult place in the world to afford a home, according to a survey released this week by US-based consultancy Demographia. The Hong Kong Economic Journal’s investor diary has some interesting observations on the survey findings.

The affordability ratio for Hong Kong this year came in at 14.9 times, meaning that it takes about all the income a household makes in 15 years time to buy a home in the city, the diary column noted.

The growing burden is reflected in the ascending trend of the ratio, which has climbed from 11.4 times in 2011 to 12.6 times in 2012 and 13.5 times in 2013. That comes despite a series of property curbs by the government.

An old public housing unit measuring less than 500 square feet in a place like Sheung Shui on the city outskirts costs more than HK$3 million (US$386,653), a reflection of the runaway market.

If the ratio has to be lowered to, say, 7 times, either household income has to double or the property prices to halve.

Considering the limited rise in salaries that is observed in the city, it is likely that home prices have to fall to a greater extent to make 7 times possible, a scenario unacceptable to the government.

Hong Kong’s property market definitely looks outrageous to foreigners. But what city is coming close?
Vancouver, a popular destination of Hong Kong migrants, is not far behind with a 10.3 times ratio.

UK is another country where Hong Kong buyers have been active, but more for investment purpose. Overall country ratio stood at 4.9 times. When London is singled out, the capital city’s ratio reaches a record 7.5 times, 56 percent more than the historical average of 4.8 times.

Investors holding British properties should beware that as the country’s economy rebounds amid an easing unemployment situation, the Bank of England may hasten its pace in revising up its benchmark interest rates.

In addition to warning of a remarkable pullback in the UK housing market last month, central bank chief Mark Carney took concrete action by setting limits to the country’s Funding for Lending program, with a view to preventing capital financing for small and medium-sized enterprises from being used for paying housing mortgages.

The central bank is due to review the controversial “Help to Buy” program for first-time homeowners in September.

With election coming up, cancellation of the vote boosting policy is unlikely. But Carney may still adjust the threshold of qualified property prices downward from 600,000 pounds sterling to push overpriced properties outside the subsidy net in a bid to deflate the property bubble.

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