Experts say inaccurate income data, imponderables make housing affordability
Financial Secretary Donald Tsang Yam-kuen last weekend gave his opinion about the fair value of flats in Hong Kong, and left property experts bewildered.
He said there was a view that a family should pay no more than 40 per cent of its income on housing.
Using this formula, he said one could come up with the figure that the fair price should be $4,000 per square foot.
Property experts say they are scratching their heads at how the Government came to that figure.
Typically, two models of affordability are used, either plotting changing monthly incomes against mortgage costs or simply comparing changing flat prices with changing incomes.
Nava SC Securities' former research director Stephen Brown said the only way to measure fair value of Hong Kong property was to do so intuitively. 'No one has successfully called the residential market consistently over time,' he said.
An affordability study was likely to be based on government household income statistics, which were grossly inaccurate measures, Mr Brown said.
'Out of an estimated two million to three million workers in Hong Kong, only something like 110,000 households pay full income tax,' he said.
Pre-tax household income figures from the 1991 Hong Kong census compared with similar figures for Britain showed Hong Kong income to be 30 per cent of Britain's.
'Obviously, there is something wrong with those figures,' he said.
Government income figures do not neccessarily factor in dividends from stock investments, overtime pay and discretionary bonuses.
'There are 300,000 or so private companies in Hong Kong, with all the family-controlled ones paying their directors no salaries to avoid double-taxing,' Mr Brown said.
The Hong Kong Institute of Human Resource and Management, a non-profit body that tracks wage levels, splits households into four categories, ranging from those which earn below $130,000 per year to those with incomes over $900,000 per year.
But its research manager Wendy So agrees it is impossible to determine with accuracy the numbers in each quartile.
'In Hong Kong, 90 per cent of companies employ fewer than 100 people, and these companies are hard to capture statistically,' she said.
Affordability studies typically look at starter flats at the cheapest end of the range in the private sector, with the assumption buyers in that category would be most affected by affordability issues and their incomes least distorted by dividends and profits.
Those people probably also lie in the bottom half of the population as distributed by income.
'Certainly, if you take an average of incomes, the wealthiest quarter of the population - who are wealthier by far - distorts average incomes,' Mr Brown said.
Besides ability to service mortgages, wealth is an equally important factor of affordability. Banks lend to a ceiling of 70 per cent of flat prices, which means a would-be home buyer has to find the remaining 30 per cent.
Unfortunately, the wealth of the average young, would-be home buyer is virtually impossible to measure, being a function of savings, family help, and a myriad other intangibles.
SBC Warburg property analyst Franklin Lam said one measure of wealth was the number of months it took for a young household to save for a down-payment on their own home.
However, Morgan Stanley managing director Peter Churchouse said that fell into the trap of measuring affordability through cash flow.
'You'd have to take the time value - inflation and interest-rate factors - into consideration, plus there's still no accurate income statistic,' he said.
Affordability was a theoretical measure difficult to quantify. 'You can't draw a line and quantitatively say that's affordable or not,' he said.
Mr Tsang's fair-value price of $4,000 per sq ft for a 500 sq ft entry-level flat means the flat would be worth $2 million.
A young family taking out a $1.4 million mortgage to cover 70 per cent of the purchase price would mean them facing a monthly mortgage payment of $15,415.
Since Mr Tsang says no more than 40 per cent of household income should be used for housing, a household would have to earn at least $38,538 per month in order to be able to afford this flat.
If we knew how many Hong Kong households made this amount of income, analysts say it would go a long way towards working out the volatility in housing prices.