Lost income mops up property-price tears

PUBLISHED : Thursday, 23 July, 1998, 12:00am
UPDATED : Thursday, 23 July, 1998, 12:00am

Along-time colleague, Stephen Brown of Kim Eng Securities, has carried out some studies that bring into question whether property in Hong Kong is really as expensive as most suppose.

Start with the basic measure of it, the affordability ratio.

This attempts to gauge the percentage of average family income required to service the mortgage on an average new flat.

Into this equation goes the price of a flat, the proportion of it being financed, the mortgage interest rate, the pay-off period of the mortgage in years, the average household income and a few other things depending on how far you want to refine it.

There is no official affordability ratio.

Many people try to calculate it and the results vary considerably.

Almost all sources, however, come up with figures higher than the 40 to 50 per cent of household income that banks consider to be the maximum affordable, and higher than the 35 per cent a mortgage burden seldom exceeds in Europe and North America.

The Hong Kong figures went as high as 200 per cent in the 1981 property boom.

But in one key input of the equation, average household income, there is reason to think the generally accepted figures odd.

As the table shows, the official figure for household income in Hong Kong in 1996 was the equivalent of US$27,100. For the United States, it was $34,076 and for Britain it was $32,000.

But Hong Kong has a much higher ratio of persons per household - 3.3 against 2.3 for the US and 2.4 for Britain. Take household income, divide it by persons per household and you get a 1996 income per person for Hong Kong of $8,212, much lower than in the US or Britain.

Now take this income per person as a percentage of gross domestic product per capita and the figure for Hong Kong works out to 33.5 per cent against 53.8 per cent for the US and 64.1 per cent for the UK.

Why should the figure be so much lower in Hong Kong? One possible answer would be that more women stay at home rather than seek employment, but the figures show that the percentage of women in the workforce is not much lower than in the US or Britain. There has, in fact, been an enormous rise in recent years in the number of women working.

Nor does an age breakdown give much of an answer.

The biggest bulge in Hong Kong's population tree is in the 30- to 40-years-old category and the percentage of people aged above 60 is lower than in the US and Britain.

The share of income going to the top 20 per cent is also not much higher in Hong Kong, so wealth is not relatively skewed.

The answer appears to be that there is a massive understatement of average household income, because census surveyors cannot check with Inland Revenue records and because almost half of Hong Kong lives in public housing, for which income is an eligibility criterion.

One can probably raise the official figure by 50 per cent. Plug that into the affordability equation and things look a lot better.