Soaring Shenzhen home prices a repeat of HK in 1997

March 02, 2016 18:03
Shenzhen's soaring homes prices remind us of the Hong Kong property bubble in 1997. Even the pace of price growth is eerily similar. Photo: Bloomberg, HKEJ

There’s nothing new under the sun.

The rapid increase of Shenzhen’s home prices reminds me of Hong Kong in 1997.

Home prices in Shenzhen rose 53 percent within a year.

New homes are being sold at an average of 60,000 yuan (US$9,158) per square meter.

Although that level is far beyond what is affordable for the middle class, buyers rush for those homes, even with “100 percent mortgages”.

I think the situation is similar to what we saw in Hong Kong nearly two decades ago in five aspects.

First, the speed. Back then, the Centa-City Leading Index climbed to 102 in June 1997 from only 66 in June 1996, a 54 percent increase.

Official data shows that in recent months, Shenzhen home prices increased about 5 percent each month.

Buyers are anxious and will do whatever possible to buy a home as soon as possible.

Second, just like the situation in Hong Kong in 1997, middle-class families in Shenzhen can barely afford such prices.

A mainland broker estimates that the ratio of home prices to household income is 28.17 times, which means a middle-class family will need 28.17 years to buy a flat even if they don't have any living costs.

The ratio in Hong Kong is 19 times.

Third, many are still rushing to buy a new home, and meanwhile, speculators are enjoying the uptrend.

Fourth, while home prices soar, the Shenzhen government announced last week that it will increase the supply of residential land and build 400,000 affordable homes in the coming five years.

Does it like the then chief executive Tung Chee-hwa’s proposal in 1997 to build 85,000 public housing units?

Lastly, homebuyers are taking on high leverage.

Data shows Shenzhen buyers are borrowing an average 65 percent of the price of their home, the highest ratio among mainland cities.

Although the ratio is lower than the roughly 90 percent borrowed by many Hong Kong homebuyers in 1997, some new financing channels are now available in Shenzhen, including “down payment loans”.

It’s similar to what we call second mortgage loans in Hong Kong.

The “down payment loan” is backed by companies like peer-to-peer lending platforms, real estate agencies and some small lenders, making it possible for some homebuyers to make a down payment of only 10 percent or even zero for a new home.

The mainland government has been injecting liquidity into the market and encouraging banks to lend more to homebuyers, in an effort to boost the economy.

While the lower-tier cities may enjoy ample liquidity, it is blowing up bubbles in the top-tier cities.

This article appeared in the Hong Kong Economic Journal on Feb. 29.

Translation by Myssie You

[Chinese version中文版]

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Hong Kong Economic Journal columnist