The Hong Kong housing market has been on an upward trend for 12 straight years.
The average home price is already 72 percent above the 1997 peak, with small flats below 100 square meters costing 73 percent more and larger flats posting a 50 percent price rise.
The surging property prices have clearly deviated from the city’s modest economic growth. Have they reached an unaffordable level?
The government measures housing affordability by using the mortgage rate for a 45 square meter flat with a 70 percent loan payable in 20 years for a medium-income household. The ratio has surged to 64 percent of the family income in the first quarter of this year, compared with 93 percent in 1997, but way above the historical average of 46 percent.
The ratio does not necessarily reflect the real picture. According to the Hong Kong Monetary Authority, households should not be allowed to obtain a mortgage in which the payment exceeds 60 percent of the family income.
Based on this guideline, a medium-income family is unlikely to get a mortgage to buy a 45 square meter apartment.
Last year, there are 2.65 million units of permanent housing in Hong Kong, of which 1.47 million or 55 percent are owned privately.
Households have to reach medium-income level if they want to buy private flats of less than 40 square meters.
Their income has to reach the top 5 percent of all households in the city to be able to buy a flat of over 100 square meters, which accounts for less than 5 percent of the city’s total permanent housing market.
According to official data, the mortgage repayment ratio for flats of less than 40 square meters already reached 71 percent in the first quarter of this year, and the ratio for flats of over 100 square meters hit 52 percent, compared with 95 percent and 90 percent, respectively, during the 1997 peak.
However, both have already surpassed the tolerance level of 60 percent and 50 percent set out by HKMA, and far exceed the average levels in the last 20 years.
Also, the two types of flats are now worth 16.6 times and 12.2 times the household income in the first quarter of this year, compared with 11.3 times and 10.8 times during the 1997 housing bubble.
This indicates that the city’s housing market — small flats, in particular — has already reached the bubble level.
The mortgage repayment ratio still lags behind the 1997 level due to record low mortgage rate of less than 2 percent, as opposed to 10 percent or even higher in 1997.
If US interest rates start to normalize in the next three to four years, the mortgage rate in Hong Kong may also rise to 2 to 3 percent.
By then, mortgage payments will become even more unaffordable, and the increased housing supply in the coming years will also weigh on the market.
This article appeared in the Hong Kong Economic Journal on July 8.
Translation by Julie Zhu
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