Take HK housing affordability surveys with a big pinch of salt
For the past week, the news pages of the South China Morning Post have been peppered with stories about how Hong Kong has the least affordable housing market in the world.
Last Tuesday, we reported a survey by US urban planning consultancy Demographia which declared that Hong Kong beats London, New York and San Francisco as the world's most unaffordable city. Hong Kong homes, it concluded, are 'severely unaffordable'.
Then on Friday, we carried a report about how even the city's hard-pressed tycoons are feeling the property price pinch. According to a survey by real estate agency Savills, it isn't only ordinary office workers who are finding Hong Kong homes increasingly unaffordable. Apparently, the oligarchs who own the companies they work for, poor souls, now have to pay twice as much per square foot when upgrading to a new mansion as those lucky old billionaires in London.
Yet although they make for eye-catching headlines, readers should take these affordability surveys with a hefty pinch of salt.
That is not to say Hong Kong property is cheap. Far from it. Housing in Hong Kong is eye-wateringly expensive. As the first chart below shows, flat prices have almost tripled since the depths of the Sars scare in 2003, and have risen over 50 per cent in the past two years. Today, even modest apartments typically sell for prices of HK$8,000 a square foot or more. As Savills points out in its survey, that's around 50 per cent more than in either New York or London.
But expensive is not the same as unaffordable.
Like most research, the Demographia survey attempts to gauge affordability across different markets by comparing the median house price in each city as a multiple of the median income earned by inhabitants.
According to its report, the typical Hong Kong worker would now have to labour for 11 years and five months, saving every cent of his or her earnings along the way, to afford the average city flat. That's more than twice as long as British wage slaves would have to work, saving all their pennies, to buy a house in Britain.
Put like that, Hong Kong certainly sounds prohibitively unaffordable. In reality, however, this 'median multiple' measure is a nonsensical comparison.
For a start, in Hong Kong, where 48 per cent of the population live in subsidised public housing, it makes little sense to measure housing affordability in terms of home prices as a multiple of the median income across the whole population. Taking the median income of private sector housing residents might be more sensible. But then, of course, the multiple would fall drastically, which wouldn't make for such eye-catching headlines.
Secondly, it is silly to measure affordability as a multiple of gross income, when workers in different markets pay widely varying rates of tax. In Britain, for example, once you have factored in indirect taxes, the average worker hands something like 30 per cent of his pay packet over to the taxman. In Hong Kong, even the most highly paid employees pay only 15 per cent of their salary. As a result, it might make sense to look at house prices as a multiple of disposable income. In that case, other markets would look much more expensive than they do in the Demographia survey, and more in line with Hong Kong.
Finally, measuring affordability in terms of home prices as a multiple of income assumes that would-be buyers save up diligently for years and then make their purchases with cash.
In reality of course, home buyers take out mortgages. So to get a more accurate idea of housing affordability you need to look not at house prices themselves, but rather at the cost of servicing a mortgage relative to worker income.
In Hong Kong, where mortgage rates are currently as low as 1 to 2 per cent, this measure gives a very different picture of housing affordability. In December, servicing a typical mortgage ate up 41.5 per cent of the average income. That burden may have doubled since the Sars outbreak of 2003, but as the chart below shows, it's a fraction of the costs that prevailed through much of the 1990s when interest rates were much higher.
So although any number of recent surveys have singled out Hong Kong as the most expensive housing market in the world, in fact housing in the city is more affordable now than it was at any point between 1994 and 2000.
So next time you see a headline about unaffordable housing, remember to reach for the salt cellar.
