Flat buyers lulled by low rates, analyst warns

PUBLISHED : Tuesday, 08 March, 2011, 12:00am
UPDATED : Tuesday, 08 March, 2011, 12:00am

Low interest rates are giving investors a 'false sense of security' that homes in Hong Kong are affordable, said Midland Realty yesterday, warning that mortgage-to-income ratios may rise further to exceed their peak in 1997.

According to the agency's database, home affordability in Hong Kong - the ratio of mortgage payments to median household income for a 20-year mortgage on a 500 sq ft private flat - currently stands at 39.3 per cent.

'Although this is still a healthy ratio, which is lower than the roughly 90 per cent in 1997, the flats in the market nowadays are older than the ones offered at that time,' said the company's chief analyst, Buggle Lau.

Back in 1997 the average transaction price and age of flats in the housing estates Midland monitors was HK$6,208 per sq ft and 10.8 years old. This compares with HK$5,557 per sq ft and 19.8 years old today. However, for flats that are 10.8 years old, prices are now HK$8,343 per sq ft, about 30 per cent higher than in 1997.

This pushes the affordability rate of such flats to nearly 60 per cent. If interest rates increased by 3 percentage points and home prices surged by 20 per cent, the firm estimated that the affordability rate would be as high as 92.2 per cent.

Though this is only one possibility, Lau warned prospective buyers to take into account important factors such as the anticipated increase in interest rates as well as market supply.

'These will affect their affordability,' Lau said. 'People think the interest rate is too low and they are too used to it.'

Chau Kwong-wing, chair professor of the real estate and construction department at the University of Hong Kong, said Midland's figures - based on the age of flats - reflected that prices of the same types of properties had surged due to limited supply of new homes in the past few years.

However, this did not mean that the overall affordability of homes - which should be calculated based on all types of private properties in the market - was a lot higher.

'It is true, though, that the affordability rate may surge significantly when interest rates start to rise, depending on the pace of the increment,' Chau said.

Based on the Financial Services and the Treasury's calculation, the home affordability ratio for a flat of about 480 sq ft rose to 44 per cent in the final quarter of last year from 34 per cent in the first quarter of 2009. The figure was 87.1 per cent in 1997.

Overall home prices rose 4.38 per cent in four weeks to 94.81 points last week, according to Centaline's Centa-City Index - a 13-year high which is only 5.19 points below the peak level in 1997. The index has risen 7.25 per cent in the first two months of this year, and the property agency expects the figure to hit the 1997-level in the first half of the year.

Albert Wong Kam-hong, senior executive director of Midland Realty, said last week that the market was displaying 'irrational exuberance' as prices continue to rocket. He abandoned his earlier forecast of an 11 per cent growth in home prices.

The founder and shareholder of Centaline, Shih Wing-ching, responded that the market could display exuberance for a long time before the bubble burst. He expects that property prices will continue to rise as the market benefits from the recovery of the US economy and strong growth on the mainland.