My adopted home is going through troubled times in the last six months. The current situation started as protests against the extradition bill proposed by the government, but has morphed into something larger. While the possible reasons behind Hong Kong's discontent cover an entire gamut of political, economic and financial issues, in this post I want to analyse a very narrow topic which in my opinion is one of the reasons of discontent among Hong Kong people: housing affordability in the city.
Hong Kong has the lowest housing affordability in the World
Everyone who knows Hong Kong understands how big a role the property sector plays in the economy. An apartment or a house anywhere in the world would generally form the biggest asset any middle class individual could dream to own, even though this wish would generally tie up the largest proportion of their net worth. But in Hong Kong, soaring property prices is increasingly turning this wish into a pipe dream. According to the 2019 Demographia Housing Affordability Survey, Hong Kong is facing a housing affordability crisis. The survey defines affordability in terms of price to income ratio (PIR), calculated as the average home price divided by average income. For Hong Kong, that ratio is 21 years. In other words, it would take an average Hong Kong person 21 years to save enough money to buy a home. The same multiple for Singapore, for instance, is 4.6.As much as 50% of expenses for an average Hong-Konger could be linked to property prices...
Housing forms 34% of Hong Kong's composite CPI (as against 23% in Singapore), or about a third of average consumer's expenditure (Source: Census and Statistics Department, Hong Kong SAR). This is only the direct housing costs, but the high housing prices in Hong Kong have indirect impact as well. For instance, most commercial establishments have to pay rental on their premises, and for most shops in Hong Kong, this works out to anywhere between fifteen to twenty five percent of their revenue. This impacts the cost of a host of services ranging from schooling to a haircut. If we add the indirect cost of property prices to the CPI, property would form about 50% of a household expenditure. (In doing so, we have assumed that 20% of the costs of all food and services bought by a household has an imputed property rental component.)...and affordability over the last 10 years has only gone down
Hong Kong's housing affordability has progressively worsened since 2003. In 2011, which was the first time Demographia included Hong Kong in its survey, the PIR for Hong Kong was already the worst in the world, at 11.4 and has since then almost doubled. The reason being, that property prices have outpaced wage growth. Chart 1 below plots average Hong Kong wages in the last ten years versus property prices, both data re-based to 100 in November 2009.
Over the last 10 years, wages in Hong Kong are up 50%, only slightly outpacing inflation, where as property prices in Hong Kong are up 178%, thus making housing in the city ever more unaffordable.
Singapore in contrast has done a better job at containing property prices
The city state of Singapore has done a much better job in controlling its property prices. Over the last 10 years in Singapore, the property prices are up only 25%, as shown in chart 2 below. In fact, current property prices in Singapore are below where they were in 2013! That was the year when transaction restrictions were introduced in Singapore as well as Hong Kong and while these measures were successful in Singapore, they have been completely ineffective in Hong Kong.
Singapore's unique property ownership model has served its citizens better
Singapore is an example worth emulating. Property ownership in Singapore is as high as 88%, among the highest in the world. This compares with less than 50% property ownership for Hong Kong. Singapore market is dominated by government-sponsored housing program, called Housing Development Board (HDB) scheme. Over 81% of Singapore's population lives in HDB flats, which are subsidized by the government. If one includes the subsidies and other grants provided by the government to encourage home ownership, the property PIR in Singapore drops to as low as 3.2 according to Demographia report, making Singapore among the most affordable large urban markets in the world.Hong Kong government's over-reliance on land premium as a source of revenue is a problem
Hong Kong in the past has followed a free market approach to everything. Yet, it's land supply policy is among the most restrictive in the world. Almost all of the land in Hong Kong is owned or controlled by the government, and is released to property developers through land auctions. The government generates about 20% of the revenue from land premium and another 15% from stamp duties on property transactions. Hong Kong government is very much aware of its reliance on property land premium. In fact, the 2019 budget document talks about the narrow base of government revenue as an issue and looks for steps to diversify these.This has resulted in poor housing situation for average Hong Kong citizens
A result of this has been a perverse incentive for the government to keep land and housing in a short supply, so that they can keep charging ever higher land premium. Home ownership in Hong Kong is only 49%, and the ownership among low income families is much lower. About 45% of Hong Kong's households live in public housing estates, but over two-thirds of these are rented. Also, the quality of Hong Kong's public housing apartments leaves much to be desired. Over 83% the public housing rental flats are less than 40sqm in size, resulting in a per-capita living space of only 13.3sqm. Over 25% of the public housing units are over 35 years old. Construction of new flats is also woefully inadequate: only 25,000 new housing units were created in 2018, and this number has remained more or less stagnant over the last decade.The current waiting list for a public housing flat is 5.5 years, but that severely understates the number of households that require assistance for housing. For FY19/20, the eligibility income limit and asset limit for a 4-person household are HK$29,240 and HK$530,000.
Eligibility threshold for public housing in Hong Kong needs to be increased
Below I highlight why the current eligibility threshold for availing public housing could be inadequate. The table below shows the average price per saleable area for apartments less than 70sqm in 2018. This is based on the aggregate of actual transaction prices in 2018.| Average price of flats <70 m2 for 2018 | |
HK$ / sqm
|
|
| Hong Kong Island | 177,928 |
| Kowloon | 147,625 |
| New Territories | 123,261 |
Based on above, an apartment in New Territories with 40sqm usable area (assuming a generous efficiency ratio of 80%, that would require buying an apartment with 50sqm saleable area) would cost about HK$5million. Assuming a 80% mortgage ratio, the buyer will have to come up with a down payment of HK$1million.
I used the online mortgage calculator available on HSBC's website to calculate the eligibility for a HK$4million mortgage. Assuming the highest available repayment period of 30 years and a default interest rate of 2.8%, that family would need a household income of HK$36,550, which is 25% above the current eligibility income threshold.
Now let's see how long will a family with that income take to save enough money for the down-payment. HSBC, in calculating the mortgage capacity, allows for 45% of the household income to be used in repaying the mortgage. If we are being slightly generous and consider that the household saves 50% of its income for the down-payment, it would mean monthly savings of HK$18,250. We have to assume that while they are waiting, the household would have to stay in a rented flat. Average rent in New territories were HK$268/sqm for 2018. If they skimp and stay in a 30sqm flat, they could end up saving approximately HK$10,000 per month after paying the rent, implying that it would take them over eight years to save the million dollars required for the down payment. If the housing prices continue to increase the way they have done, then after eight years of saving and collecting money for the down-payment, they might indeed find themselves short, with their dream of owning their home only so much more distant!
I would argue that increasing the public housing eligibility limit by even 25% to HK$36,550 would not be adequate. Firstly, in the above calculation, we have not left any slack for contingent liabilities such as any personal or medical emergencies that a family might incur and consume at least a part of their savings. Secondly, the data we have used is from last year. According to the most current information available on property prices, the Centa-City Leading Index, suggests that property prices in Hong Kong are already up 9.9% YTD.
Increasing the eligibility threshold for public housing would only increase the number of applicants and further lengthen the waiting period from the current 5.5 years. Therefore, the supply of public housing also has to be increased substantially.
Conclusion
Hong Kong's soaring property prices have made it the most unaffordable city in the world. Supply of private as well as public housing has to be increased for effective control of property prices. Public Housing in Hong Kong, majority of which is rented, is inadequate, with per-capita living space of only 13.3sqm and over a quarter of the stock more than 35 years old. The current eligibility threshold for public housing needs to be increased. Following the Singapore model of widening the property ownership could go a long way in resolving the current strife. It could even have an added benefit of creating a wider stakeholder-ship of Hong Kong citizens in their city.Sources:
- 2019 Demographia housing affordability survey (http://demographia.com/dhi.pdf)
- "Monthly report on the consumer price index, September 2019." Census and Statistics department, HKSAR government. (https://www.statistics.gov.hk/pub/B10600012019MM09B0100.pdf)
- Information paper on prices statistics, Singapore department of statistics (https://www.statistics.gov.hk/pub/B10600012019MM09B0100.pdf)
- "Major Sources of Government Revenue." Research Office, Legislative Council Secretariat, HKSAR (https://www.legco.gov.hk/research-publications/english/1718issf03-major-sources-of-government-revenue-20180530-e.pdf)
- "2019-2020 Budget." Research Office, Legislative Council Secretariat, HKSAR (https://www.legco.gov.hk/research-publications/english/1819rb01-the-2019-2020-budget-20190416-e.pdf)
- "Housing in Figures 2019." Transport and Housing Bureau, HKSAR Government. (https://www.thb.gov.hk/eng/psp/publications/housing/HIF2019.pdf)
- The Mortgage Calculator, HSBC Hong Kong. (https://www.hsbc.com.hk/personal/mortgages/home-mortgage-loans/calculator.html)
- "Centa-City Leading Index" (www1.centadata.com/cci/cci_e.htm)
