19 October 2018
Hong Kong's housing prices could show moderate corrections but a major downturn is unlikely. Photo: Bloomberg
Hong Kong's housing prices could show moderate corrections but a major downturn is unlikely. Photo: Bloomberg

Home prices may soften in HK, but don’t expect a crash

A survey released in January showed Hong Kong retaining its dubious reputation as the world’s most unaffordable housing market.

Some analysts and industry players have recently pointed to downward pressure on property prices, but most believe it is just wishful thinking if potential buyers want to sit out and wait for a crash.

Last month, veteran property investor Jacinto Tong Men-leun predicted that the bubble in the small-sized apartments market will burst within 3 to 6 months. The frightening prediction became a heated subject of discussion.

Many developers dismissed the forecast. Ronnie Chan Chi-chung, chairman of Hang Lung Properties (00101.HK), emphasized that “it isn’t possible for the small-size flats market to burst”.

In an article published in Hong Kong Economic Journal Monthly, columnist Ko Tin-yau said both sides are right and wrong at the same time. The problem is none of them had defined what they mean by “burst”, he wrote. 

Some may consider a 30 percent decline in property prices as amounting to a bursting of the bubble, while others insist that only a slide of more than 50 percent would amount to a bust. 

Ko believes that over the next three years, housing prices could show moderate corrections, but something like a fifty percent drop is very unlikely.

Gale well Group chief executive Tong Men-leung, a frontline property investor, noticed that some parents have resorted to finance companies, taking out second or third mortgages on their existing homes in order to help their children buy a flat.

The demand for second or even more subordinated mortgages is high in Hong Kong. So finance companies have been springing up like mushrooms.

There were about 300 finance companies back in 2009; the number has jumped to 1,200 at present.

If Tong’s estimation is correct, each finance company has 10 fourth-mortgage cases in hand on average. Thus, there could be a total of 12,000 such cases in the city, which can be deemed as a time bomb.

However, Sin Kwok-lam, chairman of finance company First Credit Ltd. (08215.HK), said the number estimated by Tong represents an over-exaggeration.

Most of the finance companies, according to Sin, are not involved in the mortgage business. He estimates that there are around 100 fourth-mortgage cases in Hong Kong, less than one percent of the number that Tong indicated.

There are certain benchmarks to judge the healthiness of a property market. The price-to-income ratio is one of the most popular indicators.

International survey company Demographia has used the ratio to conclude that Hong Kong is the most unaffordable city in the world.

In January, the firm revealed that the median cost of a flat in Hong Kong is 17 times the annual household income, meaning that an ordinary family in the city can only afford to buy a house after saving for 17 years without spending a dime.

But Ko suggested that it would be more meaningful to use the affordability ratio provided by the government’s Rating and Valuation Department.

Affordability ratio, which measures mortgage payment ability relative to income, stood at 54 percent as of the third quarter last year. It is a bit higher than the average of 48 percent, but it is far lower than in 1997 when the ratio hit historical high of 93 percent.

Even the pressure of market correction is looming, there are two safety nets in the Hong Kong housing market that could prevent property prices from tumbling, according to Ko.

The tightening measures implemented by the government over past few years have been suppressing demand. Once there is a noticeable weakening of the home market, the authorities would likely relax or even remove such “spicy” policies as a counter measure.

Meanwhile, as monetary policy keeps easing in China, the bull market in A-shares will sustain and the subsequent wealth effect will benefit the property market, including that in Hong Kong.

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EJ Insight writer

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