- Underpinned by strong influx of liquidity, property prices climbed nearly 25% from the trough hit in December 2008, when the Hong Kong economy was mired in recession. Luxury home prices have surpassed the 1997-peak, and prices in the mass market have also been surging.
- Both the price-to-rental and price-to-income ratios of mass market units are about 50% higher than the historical averages, suggesting an overvalued market. Nevertheless, other indicators, including speculative activities, leverage ratios and future price expectations, suggest that the housing market cannot yet be called a bubble.
- Investment demand driven by the influx of liquidity has been the key factor fuelling the recent property market rally. Future demand will depend on whether foreign funds will continue to flow into Hong Kong, which in turn is mainly reliant on how fast central banks in the advanced economies and mainland China exit their ultra-loose monetary policy. With the global recovery remaining fragile, it might be difficult for the US and European central banks to withdraw monetary stimulus in the near term.
- It is widely believed that property prices could rise further, as new supply is expected to be fairly tight, and new marginal buying activities from both investors and end-users will likely be sustained. Nevertheless, the expected price gains would probably be more moderate, as liquidity conditions are likely to be less excessive as some Asian policymakers have started the normalization process.
Housing Market under the Spotlight
Residential property prices have been surging while the Hong Kong economy was in recession. Prices climbed nearly 25% from the trough hit in December 2008, recouping all the losses suffered as a result of the financial crisis. Larger-sized units recorded bigger gains, with some having surpassed their 1997 peaks, while those at the lower end of the market are still some 25% below.
Even the Hong Kong Monetary Authority is on its guard, as it requested banks to lower the loan-to-value ratio for residential properties priced at HKD20 million or above, the so-called luxury homes, from 70% to 60%. The Hong Kong SAR government also said that it would try to refine its land policy to ward off a bubble.
Bubble Symptoms: Some but not Widespread
Is there a bubble? A housing bubble may be defined loosely as a sharp rise in property prices, generating expectations of further increases, attracting buyers or speculators who are interested in making a quick profit from short term buying and selling of properties. This further drives up demand and prices to unjustifiable levels. Checking the key bubble symptoms, namely overvaluation, speculative activities, leverage scale and expectations for future price gains, against historical averages and the 1997-peak levels show that while prices are high, other indicators are yet to reach alarming levels.
Overvalued Housing Market
Price-to-Rental Ratio Backs to 1997-Peak Level
Are property prices too high? The price-to-rental ratio provides one of the yardsticks to gauge whether housing is priced at fair value.
For instance, the price-to-rental ratio for a 1,500 square feet flat (the so-called luxury home) located on Hong Kong Island was 40.2 in September 2009, meaning that it would take over 40 years for the property investment to break even disregarding interest and other expenses. The ratio was 42% higher than a reading of 28.3 during the 1997-peak and 122% above its 1982-2009 historical average of 18.1.
The situation is not any better in the mass market. Take the price-to-rental ratio of a 600 square feet flat located on Hong Kong Island as an example, the latest reading is not only back to the 1997-peak, but is also 53% higher than its historical average.
Housing Price-to-Income Ratio is Not Too Far Below 1997 Bubble Market
Another useful check on property market valuation is the housing price-to-income ratio. Again, the luxury segment looks bubbly. For instance, the price-to-income ratio of a 1,500 square feet flat located on Hong Kong Island was 115.3 in September 2009, meaning that the price of such a flat is equivalent to over 115 years of an average household's income. The ratio was 24% higher than that prevailing during the 1997-peak and was also 120% above its historical average.
Conditions in the mass market might look less bubble-like, but prices in the sector are not inexpensive by historical standard. For instance, the price-to-income ratio of a 600 square feet flat located on Hong Kong Island was 19.8 in September 2009, not too far from a reading of 22.3 during the 1997-peak and was 54% above its historical average ratio of 12.9.
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