Hong Kong residential prices have never been so unaffordable. The home price-to-income ratio in early 2018 was almost 19x – a record high and 50% higher than the 20-year average of 12x. With property price growth markedly outpacing income growth, the average new mortgage duration has lengthened to 27 years, from just 21 years in the last bull market of 2007.
Between December 2012 and 2017, price growth of a 500 square foot apartment in Taikoo Shing — a typical middle-class private accommodation on Hong Kong Island — appreciated by 51%, or by HK$3.1mn. In goods and services equivalent terms, the price appreciation would have paid for 19 university degrees, a monthly visit to a three-star Michelin star restaurant for 87 years, quarterly return tickets to Tokyo for 92 years, dinner at restaurant Café de Coral every day for 102 years, or two short rides on the MTR subway per day for 960 years.
Bank of Mum and Dad
Despite the unaffordability of Hong Kong properties, housing demand looks likely to grow further. There are a number of reasons for this. First, between 2014 and 2017, the ratio of owner occupiers in private sector housing declined from 66.4% to 64.2%. This ratio against the growth in stock of residential apartments indicates a growing pool of tenants and as a result, growing pent-up demand.
Secondly, more parents are subsidising the down payments of their children, sometimes by remortgaging their own properties. This can be seen from the rising ratio between property remortgaging and property transactions, despite flattish mortgage rates. With 66% of Hong Kong residential properties without an outstanding mortgage, and the loan-to-value ratio of properties with a mortgage being well below 50%, demand will expand as long as the price rise expectation remains.
And this is before demand from mainlanders who have stayed to work in Hong Kong is taken into consideration. Many were caught by surprise when the Buyer’s Stamp Duty (BSD) was introduced in 2012. But since then, many are meeting the seven-year stay requirement to obtain permanent residency in Hong Kong, which removes the BSD burden. Assuming that 20% of mainlanders obtaining a work visa before 2012, and 30% of mainlanders obtaining the visa in and after 2012 will buy a property in Hong Kong, there will be potential pent-up demand for 15,700 apartments to be satisfied shortly – equivalent to 80% of Hong Kong’s annual supply.