23 October 2018
Building more public rental flats is the key to solving  the housing problem, not encouraging people to buy homes of their own. Photo: AFP
Building more public rental flats is the key to solving the housing problem, not encouraging people to buy homes of their own. Photo: AFP

How much do home prices need to drop before they’re affordable?

The 2015-16 budget announced last week put a lot of emphasis on economic development and HK$34 billion (US$4.38 billion) of “sweeteners”, while hardly mentioning property prices.

However, the Monetary Authority stunned the market Friday by introducing a new string of measures in an attempt to further curb property prices.

These include lowering the maximum loan-to-value ratio for residential properties for the buyer’s own use, reducing the maximum debt-service ratio for borrowers buying a second residential property, and lowering the maximum debt-service ratio for mortgage loans for all properties not lived in by the buyer.

In the face of an insufficient supply of housing, many believe these measures will make it even harder for average citizens to buy homes of their own.

It remains to be seen whether these latest measures will prove effective in driving down skyrocketing residential property prices.

In this article, I am not going to predict when property prices are likely to fall. Instead, I am going to define what is meant by reasonable and affordable property prices.

In other words, how much do property prices need to drop before homes become affordable again?

I believe it is the government’s responsibility to keep residential property prices at an affordable level for first-time homebuyers.

Last month, a global survey on home affordability commissioned by Demographia in the United States received wide media coverage in Hong Kong.

The report calculated the ratio of property prices to family incomes in 378 cities across the globe. It concluded that if the median multiple in a city reaches 5.1 or more, then its home prices will be “severely unaffordable”, while home prices are considered “affordable” if the ratio is 3 or less.

The median multiple for Hong Kong is 17, making it the city with the least affordable homes in the world.

If the ratio was to return to reasonable levels in Hong Kong — that is, a median multiple of 3 or less — then property prices would have to drop by a whopping 82.4 percent!

If the affordability of homes in Hong Kong approached that in Vancouver, which has a median multiple of 10.6, London (8.5), New York (6.1) or Tokyo (4.9), then property prices in our city would have to plummet by 37.8 percent, 50.1 percent, 64.2 percent and 73 percent, respectively.

In the past two decades, according to the Rating and Valuation Department, the biggest decline in home prices in Hong Kong occurred during the 1997 Asian financial crisis, when the home price index fell 66.2 percent.

Property prices then hit rock bottom in July 2003, when the index fell to 58.4.

Given that the median annual household income in 2003 was about HK$180,000, the median multiple for the city was about 6, which would still have been categorized as “severely unaffordable” under Demographia’s criteria.

Subsequently, the administration was unable to halt the soaring of property prices even after it introduced tough measures in 2012, so whether the measures announced by the Monetary Authority will work this time remains questionable.

However, it appears that the intention of these new measures is merely to put the property market back on a healthy track rather than to drive down property prices.

Indeed, there remain several ways in which the government can push down property prices, but the administration seems to have had cold feet in carrying them out.

That is partly because it is afraid of being blamed for bursting the bubble, and partly because it doesn’t wholeheartedly want to see lower property prices, because of pressure from vested interests such as the banks and big developers.

Besides, it is also in the government’s own interest to maintain high property prices, so that it can continue to generate high revenues from land sales.

However, things might not turn out in the way the government wants, because once the housing bubble bursts, the government is still likely to be blamed, because it has allowed the housing bubble to grow unchecked in the past decade.

As I have said before, the key to solving the housing problem in Hong Kong is increasing the supply of public rental flats and lowering the threshold for applying for these flats, so that the housing needs of average citizens can be satisfied.

With fewer people seeking to buy homes of their own, property prices are likely to come down.

Unfortunately, the administration did exactly the opposite by proposing a premium loan guarantee scheme for subsidized flats in the latest budget to promote the circulation of those flats in the market, luring more people into becoming “slaves to their homes”.

It seems our housing problem is likely to deteriorate, and all we can do is prepare for the worst.

This article appeared in the Hong Kong Economic Journal on Mar 2.

Translation by Alan Lee

– Contact us at [email protected]


A member of Shadow Long Term Housing Strategy Steering Committee, a non-governmental organization.

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