Whether HK is in a bubble depends on how you look at it
It's now six months since Hong Kong's government and the International Monetary Fund began sounding the alarm about a bubble in the city's property market.
This week, they were at it again. Yesterday, Financial Secretary John Tsang Chun-wah said 'the government is deeply concerned about the rising trend of property prices' and threatened to increase the stamp duty in an attempt to check further rises.
Meanwhile, the IMF devoted an entire section of its latest Global Financial Stability Report to the danger of asset bubbles, warning that 'booming Asian real estate markets may pose risks to financial stability as banks are increasingly vulnerable to a price correction'. Hong Kong's market was singled out for special scrutiny.
Yet despite all the warnings, it is still not clear that there really is a bubble in the city's housing market. In truth the signals are mixed, and whether you see a bubble or not depends a great deal on whether you want to see one or not.
Take prices. Bubble-fearers have made a great deal of mileage out of the news that prices at the luxury end of the market have now surpassed their peak at the height of the 1997 property boom.
But sales of luxury properties - those with a floor area greater than 1,700 square feet or 160 square metres - are an insignificant proportion of the overall market by number. If you look at the sort of apartments most people inhabit - those with a floor area between roughly 450 and 650 square feet or 40 to 60 square metres - the picture is altogether less alarming. Prices are still 24 per cent below their 1997 high (see the first chart below).
Similarly, the rate of price increases - up 30 per cent over the past 12 months - sounds worrying. But that's actually less than in the 2007-08 bull market, when prices rose 36 per cent in a year, or during the rebound from Sars, when they climbed 45 per cent. And it looks positively modest when compared to the rate of increase in 1997, when prices rose an astonishing 57 per cent in a single 12-month period.
What's more, Hong Kong dollar transaction volumes have fallen from last summer's high and are now considerably lower than during the 2007-08 boom, indicating some cooling of the market.
Of course, if transaction volumes are falling, it could be because prices have climbed beyond the reach of most buyers. According to a survey commissioned by the South China Morning Post, Hong Kong homes are now among the least affordable in the world, typically costing 10 times the city's average income.
That certainly makes it sound as if there is a bubble in the market.
But what the survey actually shows is that Hong Kong homes are expensive, not that they are unaffordable. Affordability is usually measured not as a ratio of price to income, but in terms of the cost of mortgage payments relative to income. And thanks to low interest rates, mortgage charges are eminently affordable at the moment at just 36 per cent of income, less than half the 1997 level and lower than at any time during the 1990s.
Panic about a bubble would be understandable if low mortgage rates were fuelling speculation or encouraging buyers to take on dangerous amounts of leverage likely to come back and haunt them when interest rates rise.
At first glance, it looks as if that might be the case, with property loans making up about 50 per cent of new bank lending and the total value of outstanding mortgages rising to an unprecedented HK$650 billion (see the second chart below).
But on closer examination, the picture is less troubling. The value of new mortgages made by the city's banks fell to just HK$17 billion from HK$26 billion in July last year (see the third chart). And loan-to-value ratios have dropped to a moderate 62 per cent, indicating that there is little or no rush to leverage up.
Meanwhile, speculative activity remains low, with the proportion of buyers flipping properties back to the market for a quick profit standing at under 2 per cent, less than half the level during 2007-08.
That doesn't mean the government's concern is misplaced. Property prices are high and rising. And with liquidity plentiful and mortgages available at interest rates as low as 0.75 per cent, considerably lower than the rate of inflation, they are likely to go on climbing for a good while yet.
But with leverage levels low among both homebuyers and banks, and with the Hong Kong Monetary Authority leaning on mortgage lenders to maintain tight prudential standards, there are few signs yet of a 1997-style credit-fuelled speculative bubble in the city's housing market, whichever way you want to look at it.