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Housing Affordability in Hong Kong
by Dr Edward CY Yiu Associate Professor
Dept of Geography and Resource Management, Chinese University of Hong Kong
DSE Seminar, CUHK
18 Jan 2014
2
3 Explanations for the Unaffordable Housing Price HK
• Land is scarce, • Insufficient housing supply, and • Negative real interest rate.
• Which one is more plausible? • Why?
3
Is the Housing Price Unaffordable?
• What do you mean by UNAFFORDABLE? –Who? Which housing unit? –Location? Size? Age?
• Higher than the 1997 peak is too high?!
• Even a professional cannot afford, it is too expensive!
Unaffordable Housing
A decent housing in HK is unaffordable
Median to Median
International Std
2012 HK
Price to Income Ratio
< 6 15
Rent to Income Ratio
< 30% 37%
Price to Income Ratio:
HK 2011 = 12.6
SIN 2011 = 4.4
Mortgage Tenure Decade
s Max LTV Max
Tenure HPI MTI
Ratio
1970s 90% 10 yr 20 NA
1990s 70% 20 yr 100 110%
2000s 70% 25 yr 60 20%
2010s 50% 30 yr 126 56%
2030s ? 40 yr? ? ?
7
Mortgage-to-GDP Ratio Asia
• Moderate MTGR: MTGR of HK grew from
30% in 1996 to 50% in 2002; then dropped to 30% in 2007, back to 45% in 2013.
MTGR of China is just 17% in 2012.
MTGR of Singapore increase from 20%->40% in 13 years
http://www.dbs.com/insights/conference/2013/slides/IsThereAPropertyBubble_AndHowToSpotOne.pdf,
http://research.stlouisfed.org/publications/es/13/ES_13_2013-05-03_chart.pdf,
http://ecyyiu.wordpress.com/2013/07/27/household-debt-to-gdp-ratio-and-mortgage-loan/
Housing Price Volatilities
8
+60%,-40%!
Global #1
Increase
2012
9
Is Land Scarce in HK?
• Only 24% of land has been developed, • Only 9.5% of land has been used for
residential, • Government vacant land for
residential use amounts to 2,153.7 ha (sufficient for accommodating 2 million population)
• Total Govt vacant land = 3,997.2 ha
Existing Land Use Distribution
Zoning Land Area (ha)
Residential 9,759.5
Commercial 803.1
Industrial 1,478.9
GIC 3,676.7
Recreation 2,587.4
Total 58,989.5
•Industrial land would mostly be converted into commercial use;
•GIC land can also be converted into residential use。
http://blog.yahoo.com/ecyyiuu/articles/624292/index
Government Vacant Land
•July 1, 2012 LegCo paper: –1,300 ha vacant res.
land are reserved for building Small Houses for Indigenous Villagers;
–Land is scarce because they are reserved!
Zoning Land Area (ha)
Residential 2,153.7
Commercial 24.6
Industrial 298.3
GIC 777.7
Recreation 742.9
Total 3,997.2
http://blog.yahoo.com/ecyyiuu/articles/624292/index
2010 SIN 2012 HK
Res. 10,000 (14%) 9,760 (9.5%)
Ind./Com. 9,700 (13%) 2,300 (2.1%)
Green 5,700 (8%) ~73,000 (66%)
GIC 5,400 (8%) 3,700 (3.5%)
Total 71,000 109,200
Land is NOT scarce but is at the sole discretion of
the government.
Land Use Area (ha)- SIN v HK
13
Is Housing Supply Insufficient? 2006 2011 Average
Growth p.a.
Total No. of Housing Units
2,477,300 2,601,800 24,900
Total No. of Households
2,226,546 2,368,769 28,445
Vacant / Others 250,754 (10%) 233,031 (9%) > the NVR (4%)
Population： 6,864,300 7,071,600 41,460
Public Housing: 714,200 747,900 6,740
Subsidized Housing: 393,700 390,800 -580
Private Housing： 1,369,400 1,463,100 18,740
No. of Housing Units > No. of Households
Year Population No. of Households
Ave Household
Size
Mid 1983 5,345,100 1,334,300 4.01
Mid 1993 5,919,000 1,677,700 3.53
Mid 2003 6,731,000 2,081,000 3.23
Mid 2013 7,184,000 2,420,800 2.97
Strong growth of population and number
of households
Population and Households HK
Year Private Housing
Subsidized Housing
Public Rental
Housing
Total Housing Stock -
Households
1983 542,000 36,000 533,000 1,111,000 -239,000
1993 833,000 186,000 677,000 1,696,000 -10,000
2003 1,258,000 395,000 679,000 2,332,000 251,000
2013 1,458,000 391,000 766,000 2,616,000 195,200
Fast increases of both public and private
housing stocks, from shortage to surplus
Housing Stock HK
Insufficient Housing Supply is a
Tautology • High Price -> Insufficient Supply! A Tautology!
• It cannot be empirically verified, because housing
demand cannot be observed.
1994 1997 2002 2009 2012
Housing Units Completed
34,000 18,202 31,052 7,160 11,890
yoy 21% -8% 18% -18% 26%
Housing Price Index
114.9 163.1 69.9 121.3 200.2
yoy 24% 40% -11% 1% 10%
http://blog.yahoo.com/ecyyiuu/articles/160936 No Corr.
17
Then, Why HK still Has Housing Problems?
• Unaffordable Housing; • Subdivided Flats and Coffin Rooms; • Dilapidated Buildings and Walled City.
Country/ city
GDP per Capita
Ave. Living
Area (sf)
Per Person
(sf)
US 51,704 2,476 ~800
Taiwan 38,357 1,119 ~370
SIN 60,799 1,044 323
Tokyo 35,855 667 ~220
Shanghai 9,055 560 194
HK 50,936 452 161
Ave per person living area of HK = 0.5 of SIN
Modest overall density,
but very high urban
density of HK.
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Why Real Interest Rate Matters?
• Housing is both an investment goods as well as a necessity;
• Interest rate is the cost of borrowing; • Housing is excellent in hedging
inflation; • Housing is less risky (moral hazard).
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Push Up Homeownership Rate • By direct subsidy (very costly and inefficient)
– Government builds and provides shelters to the needy
– Provide home rental or buying subsidy; • Hong Kong (50% in PRH, HOS, TPS)
• By indirect financial engineering: (very risky) – Provide mortgage loan subsidy; – Tax relief on housing; – Deregulation and securitization.
• REITs
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Homeownership Ratios in Asia 2013
• Singapore: from 29% in 1970 to 92% in 2000; • China (urban): from 17% in 1985 to 82% in 2010; • HK: 35.1% in 1986 to 51.3% in 2013 (Target was 70%, TPS in 1997).
Ronald and Elsinga (2012), Census and Statistics Department, HKSAR
http://www.joneslanglasalleblog.com/APResearch/residential-research/chart-of-the-
day-home-ownership-rate-in-china#.UmS3OnbyyUk
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Homeownership Makes Citizens Under Control
• “the Thatcher governments utilised increasing levels of home ownership as a means of making citizens responsible consumers by exposing them to the outcomes of monetary policy. Perhaps now the credit crunch is another realisation of this policy.” (Rowlands, 2010)
24
Government’s Roles in the Housing Sector
Govt’s Roles in Housing Market
Sole Land Supplier
(18% land sale income excl. other
related taxes)
Biggest Developer and Housing Owner (Public Housing)
Policy Maker and Law Enforcer
Users (Quarters)
and Facilitators
(Loans)
BANKS
/ HKMC Monetary
Policy
Govt
cannot let
housing
price drop
Income
Bank
Risk
Negative equity
and unemployment
Private
Housing
Market
HOS (by
lucky draw)
PRH (by
queuing)
How HK Monetary Policy Affects Housing Price?
• Currency Board Arrangement
• Currency exchange rate is fixed!
– Linked Exchange Rate (peg) US$1 = HK$7.8;
• Interest rate is fixed!
– If the rate does not follow the US's, arbitrage can make no-risk profit!! (carry-trade)
• Inflation does not follow
– Economic conditions very different from the US;
– When the economic conditions are opposite, then
– Either a LOW INTEREST RATE + HIGH INFLATION;
– Or a HIGH INTEREST RATE + HIGH DEFLATION.
Implications of Neg. RIR
• Saving in cash is a net loss;
• Borrowing to invest in housing is costless;
• Monthly mortgage payment < Monthly rent;
• The risk of loss is capped by government bailout;
• Who can borrow more determines who can earn more;
• Low interest rate in the US usually accompany US$ drops;
• If US$ drops, foreign investors can earn both capital gain and currency gain, by buying HK housing units.
Negative Correlation of Real Interest Rate & Housing Price
• Casual observations confirmed the negative relationship hypothesis:
1996 2001 2006 2011
HIBOR % 5.48 3.44 4.21 0.27
CPIA yoy % 6.31 -1.60 2.03 5.51
RIR -0.83 5.04 2.18 -5.24
HPI (yr end) 134.5 73.8 93.8 181.1
RIR v. HPI yoy of HK
RIR v. HPI yoy of HK
A More Robust Empirical Test
2010 JFMPC 14(3), 257-270
