How Unaffordable Is Hong Kong Housing?

JULY 20, 2011   THE WALL STREET JOURNAL

By Isabella Steger

MIKE CLARKE/AFP/Getty Images

When investment bankers start pontificating on Hong Kong’s housing and income inequality problems, you know it’s a serious problem.

A story and accompanying video by Polly Hui in the WSJ explores the problem of subdivided flats in Hong Kong as the government pledges it will address public anger over record house prices and reassess land policy. J.P.Morgan has helpfully crunched the numbers in a note, “Unaffordable housing,” to show just how unaffordable housing has become for the general public and why the government’s cooling policies have been ineffective.

For starters, incomes are increasing nowhere near as fast as house prices; median household income in March 2011 was HK$19,100 (US$2451). More than 50% of families earn just HK$20,000 per month, and only 4.2% of households have an income over HK$100,000 a month. Nominal median income for households is 27% less than in 1987. Writes JPM:

A 1,300 sq ft apartment in the Belcher’s (upscale private complex in Hong Kong’s Western district) is equivalent to 11.6 times an income of HK$100,000 per month. Even wealthy households cannot pay for property from income.

Never mind the Belcher’s, even apartments in one of Hong Kong’s largest private estates, the three-decade old Mei Foo Sun Chuen, is out of reach for most, which JPM finds “most disturbing” (not to mention the fact that when the estate was built, it was on the coast—the view is now blocked by the West Kowloon Highway and a container terminal block, it adds). Assuming a loan-to-value ratio of 70%, the initial payment for a 675-square-foot flat would be around four times median household income. Assuming the household saves 20% of its income for the down payment, it would take the household 18 years to save for just the initial payment.

Prices of these so-called “blue-chip property estates” have also exceeded their 1997 peaks, according to JPM, with returns from smaller, medium-priced apartments in the New Territories at 27% on average in the last two years, compared with 15%-18% for more expensive flats in Hong Kong Island and Kowloon.

The culprit is of course, in part, ultra-low interest rates, but the government’s response to lower loan-to-value ratios is counterproductive and has simply “shut out the bulk of the population from the market.” While lower LTVs means lower mortgage payments, the improvement in affordability is deceptive, says JPM, as long as “the denominator remains median income of households.” And with mortgages expected to increase, affordability will only decrease from here (affordability is calculated by property value times LTV times mortgage rates).

The message from JPM is loud and clear: “Hong Kong…needs more affordable housing.” Oh, and buy landlords over developers.