Understanding Hong Kong Property Prices

Understanding Hong Kong Property Prices

With the recent turmoil in Hong Kong, one might have thought about some of the social tensions underlying the protests. For example, Hong Kong has some of the most expensive house prices in the world. According to an International Housing Affordability survey by Demographia, Hong Kong’s current market multiple is 20.9.[1] This means that it takes 20.9 years for an average Hong Kong household to purchase a house, compared with the median market of only 4.4. Let’s take a closer look at why this is the case.

The supply side

With a total land area of 1,111 km2 accommodating 7.4 million people, Hong Kong is one of the most densely populated places in the world.[2] Yet the problem lies in the development of land which has slowed significantly after the 2000s.

Two interesting statistics support this. Between 1995 and 2005, the total area of built-up land has increased by 6000 hectares. However, this rate has dropped to only 400 hectares in the next 10 years. Reclamation – the creation of new land from oceans or riverbeds – is responsible for the housing of about 27% of the population. Yet the rate of reclamation has also dropped 80% to an average of 40 hectares per year since 2001.

While three-quarters of Hong Kong’s total land is currently undeveloped, most of these undeveloped lands are country parks and special conservation areas, on which development is opposed from environmental groups and subject to punitive planning rules.[3] As land supply diminishes, there is little wonder why the annual housing completion for both public and private flats has decreased since 2005 (Figure 1).

Figure 1: New Residential Unit Completions by Property Type. Source: Task Force on Land Supply

Additionally, the government has failed to meet its supply target for public housing. Take, for example, the long-term housing strategy announced in 2014 that would have set a 10-year target of 290,000 public housing flats. Per the schedule, by 2019 Hong Kong should have had 116,000 new public flats. However, the actual number of completed flats were only 70,400: 40% lower than the forecast.[4]

Over time, the average waiting time for Public Rental Housing (PRH) for general applicants has reached 5.4 years, far longer than the Housing Authority’s target of 3 years.[5] A combination of unsuitable land for development along with regular construction delays has been key in the government’s failure to meet supply targets.

The demand side

The rise in housing prices during the last decade has been partly fuelled by Hong Kong’s low-interest environment. Since 1983, Hong Kong has operated under a linked exchange rate system which pegs its currency with the US dollar at an exchange rate of 1USD/7.80HKD.[6] This peg has inevitably led to some incompatibility between Hong Kong’s monetary policy and housing price situation.

For example, with house prices began recovering in 2009, a weak US dollar and low-interest rate prompted many to search for higher yields. As Asia’s financial hub with free capital mobility and low mortgage rate, Hong Kong’s property market becomes an attractive choice for investors. Capital inflows from China’s stimulus package and western investors have pushed property prices higher.[7] Looking at Figure 2, the housing price index has skyrocketed upward in spite of a steadily low mortgage rate since 2008.

Figure 2: Housing price index and average mortgage rate. Source: R&VD and HKMA + writer’s estimation

Over the past decade, the number of domestic households has also grown steadily to 2.61 million, bringing a constant increase in demand for public and private housing. Without affordable housing, people instead scramble to apply for public housing, as well as Hong Kong’s Home Ownership Scheme (HOS). The HOS is a subsidised sale program in which the government sells flats to eligible applicants at a price below the market value. In 2018, the HOS was overly subscribed with 57 applicants competing for one flat.[8]

With Hong Kong’s population expecting to grow to 8.22 million by 2043, the demand for affordable housing shows no sign of slowing. Graph 1 shows that rising housing prices are the result of a simple supply and demand problem. At P1, a supply and demand gap exist as the quantity demanded housing is far greater than the supply of housing. Price raises to P2 where equilibrium occurs. Demand curve D2 reflects the increase in demand due to investment interests in housing. Price raises to P3. Meanwhile, the short run supply curve is relatively inelastic because there are time lags in the supply of housing.

Graph 1: Supply and demand of Hong Kong Housing.

Government planning and the future

In 2013, the government began curtailing the speculative demand for housing via highly punitive transaction taxes such as special stamp duty and buyer’s stamp duty. These measures have temporarily eased rising house prices. However, they do not address the underlying problem of land shortage. Under the Hong Kong 2030+ territorial development strategy, it is estimated that land requirement for the next 30 years will be at least 4,800 hectares. After considering the land supply of 3,600 hectares from planned and committed developments, there is still a shortfall of at least 1,200 hectares up to the year 2046.2

Multiple strategies have been suggested to increase the supply of land in the long run. One of the proposals is the “Lantau Tomorrow Vision”, proposed by Chief Executive Carrie Lam in 2018, which involves constructing an artificial island of about 1,700 hectares through land reclamation of the eastern waters of Lantau Island.[9] Others have instead advocated for the re-purposing of a golf course in Fanling, as it is used only by tycoons and business elites. No matter which strategies the government adopts, the urgency of finding land is apparent. The renovation and redevelopment of public houses must also be addressed in the long run. 

Housing is a basic need for all people, and is a lifetime goal for many workers. If property prices continue to rise, then, for some people, the dream of owning a house will disappear. The government must learn from the past if it wants a better future for all Hong Kong citizens.

[1] Demographia. (2018). 15th Annual Demographia International Housing Affordability Survey: 2019. Retrieved from http://www.demographia.com/dhi.pdf

[2] Task Force On Land Supply. (2018). How to tackle land shortage? Retrieved from https://www.landforhongkong.hk/file/pamphlet/TFLS%20PE%20Pamphlet%20(English%20Version).pdf

[3] Chun, W., & Kwan,L. (2018, October 14). Hong Kong is starved of useable land, and New Territories North offers real hope. South Morning China Post. Retrieved from https://www.scmp.com/comment/insight-opinion/article/2168340/hong-kong-starved-usable-land-and-new-territories-north

[4] Ip, Ryan., & Poon, I. (2019, February 19). Missing the targets. Our Hong Kong Foundation. Retrieved from https://www.ourhkfoundation.org.hk/en/report/18/land/missing-targets

[5] Hong Kong Housing Authority. (n.d.). Number of applications and average waiting time for public rental housing. Retrieved from https://www.housingauthority.gov.hk/en/about-us/publications-and-statistics/prh-applications-average-waiting-time/index.html

[6] Wu, T., Cheng, M., & Wong, K. (2017). Bayesian analysis of Hong Kong’s housing price dynamics. Pacific Economic Review, 22(3), 312–331. Retrieved from https://doi-org.ezproxy.lib.monash.edu.au/10.1111/1468-0106.12232

[7] Wong, Y. C. R. (2015). Hong kong land for hong kong people: Fixing the failures of our housing policy. Retrieved from https://ebookcentral-proquest-com.ezproxy.lib.monash.edu.au

[8] Staff writer (2018, October 19). Home Ownership Scheme 2018 oversubscribed as citizens scramble for affordable housing. Hong Kong Business. Retrieved from https://hongkongbusiness.hk/residential-property/news/home-ownership-scheme-2018-oversubscribed-citizens-scramble-affordable-hou

[9] “Hong Kong wants to build” (2019). Hong Kong wants to build massive artificial island. The Economist. Retrieved from https://www.economist.com/china/2019/05/30/hong-kong-wants-to-build-massive-artificial-islands