Hong Kong property
Mid-levels they ain’t
A fall in prices may be imminent, thanks partly to a new leader
IF PROPERTY prices are a guide, Hong Kong is the most desirable place on Earth. Office rents, at some $160 per square foot a year, are now the world’s highest. New homes are also the dearest: one estimate puts prices 55% above those in London. The luxury real-estate arm of Christie’s, a British auction house, has just opened its first Asian outpost in the city. That is a bold move. Prices have surged by some 50% since early 2009, returning them to the level seen before Hong Kong’s last property crash in the late 1990s (see chart). Is history about to repeat itself?
Demand is robust. Hong Kong has pegged its currency to the American dollar, so the Federal Reserve’s loose monetary policy and bouts of quantitative easing have left interest rates far below the rate of inflation. With few other options for investing their money profitably, locals buy property. The peg has also reduced currency risk, making Hong Kong property even more attractive to outsiders. The most important of these buyers are mainland Chinese, who account for perhaps 14% of all residential sales (and a much higher share of new and high-end apartments) despite China’s capital controls.
The biggest factor behind the rise in prices, though, is constricted supply. The government has a monopoly on land in Hong Kong, and it doles out more parcels for auction only when it deems fit. Since 2002 or so, observes C.K. Lau of Jones Lang LaSalle, a property broker, officials have maintained “extremely tight land supplies”. Less land at auction has inevitably resulted in fewer homes being built. In the 1990s new-home completions averaged about 23,000 a year. That figure has been only 10,000-11,000 a year of late.
There are grounds, then, for believing that the market’s high values are warranted by the fundamentals of strong demand and tight supply. “This market is not a bubble—yet,” insists Paul Louie of Nomura, an investment bank. He points out that there is little unproductive stock, as barely 4% of commercial or residential property sits idle. As for affordability—the typical new flat costs as much as 12 times the median salary of the typical buyer—he notes that incomes have risen by a quarter since 1997. And leverage is quite low. Some 60% of private homes carry no mortgage. For the rest, servicing mortgages costs owners only about a fifth of their salaries.
But even if prices are justified by fundamentals, those fundamentals can change. Worrywarts can imagine a variety of mishaps that could bring the market down to earth. Some are beyond local control. A sharp rise in American interest rates, for example, would have a big impact on the local credit market. Another possibility is a hard landing in China, which would not just affect the flows of mainland money but also risk wider economic woe. The general crisis in confidence in emerging markets that would surely follow a China crash would probably lead to a broader sell-off, battering the city’s financial and property sectors.
A more plausible reason to think the market may be close to its peak is a looming shift in government policy. C.Y. Leung, who takes over in July as Hong Kong’s new chief executive, has made it clear that he wants to end the expensive-land policies pursued by the outgoing administration. He wants to speed up the rollout of subsidised housing, which will dampen the private market. More important, he promises to make more land available: for example through zoning changes, the redevelopment of old residential sites and land-reclamation projects.
Towering prices, too
The local press is abuzz with stories about homeowners rushing to sell to cash in on high prices before looser land policy kicks in. Worries have spread even to the current administration, whose policies are partly responsible for property’s priciness. John Tsang, Hong Kong’s financial secretary, warned on his official blog this month that he is “highly concerned about the risk of a price bubble” in real estate.
Such concern looks justified. The Economist’s own quarterly home-price index compares prices in 21 economies. The most recent index, published in March, found that Hong Kong property was then 58% above “fair value”, which we define as the long-run average ratio of prices to rents and incomes. That put Hong Kong second only to Singapore as the most overvalued property market in the index.
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