Hong Kong’s real problem is not shortage of homes, but affordability of homes
Regulatory issues nor frozen plot ratios are as important as the cost of monthly mortgage repayments
One way the shortage of housing could have been avoided is through the plot ratio, which is used to control development
Richard Wong, Back to Business, October 5
I greatly respect Richard Wong’s scholarship in housing matters but sometimes I think he should take a year away from that pristine university environment and become an estate agent in the trenches of the property market.
In my view the housing shortage is a misnomer and he has ignored interest rates, the real driving force of property prices.
First, that housing shortage. There is none. We had one in the 1970s when up to 20 per cent of the population lived in squatter huts. But thanks to public housing and a big private development push these squatter towns are now gone. With only a few scattered exceptions, all holders of permanent ID cards live in formal homes.
Yes, I recognise that some people live in squalid sub-divided flats. I am sorry for them but the large majority are migrants without permanent status. Our social services cannot bear full responsibility for everyone who takes a whim to moving here.
The big problem is that our homes are mostly tiny and ever more of the occupants want to move out. Average household size has fallen from 3.4 persons 20 years ago to only 2.9 at present, which is a big drop. Housing demand is thus driven by housing aspirations, not by housing shortage.
And these aspirations will only finally be met when every resident of Hong Kong has his or her own 2,000 square foot seaside flat with clubhouse and parking for two cars per flat.
Demand in other words is an elastic matter of more or less tension at any given time and it can never be fully satisfied. Nonetheless, if you have a permanent ID card you sleep on the street only by choice. And that’s the important thing.
Now to price. When buying a home, only a very few of us can haul out a chequebook, write in the full amount and say, “Here you go. Where are the keys?”
The other 99.99 per cent of us have to do it through mortgage and the important question then becomes the size of the monthly mortgage payment. Can we pay it and still have enough income left over for daily needs?
This question is best expressed in statistical terms by something called the affordability ratio, the percentage of average family income that must be devoted at prevailing interest rates to a monthly mortgage payment for an average flat.
The Centaline Property Agency publishes such a ratio for small private flats and the chart shows you its historic trend. The ratio, says Centaline, went as high as 113 per cent in mid-1997, which is an impossibility and one good reason that the market then crashed. But the ratio at present is only 50 per cent, despite the fact that prices for small flats are now almost double what they were in mid-1997.
The difference is all down to interest rates on mortgages. They were in the 12 per cent range in 1997. They are now all based on interbank rates and in the low single digits.
Cost of money, cost of money, cost of money, how do I hammer it home? We are in a property price bubble because our currency is linked to the US dollar and thus to its irresponsibly low interest rates.
The big problem is not a housing shortage, nor a regulatory overload on construction, nor frozen plot ratios. Above all else, Richard, it is the effect of the cost of money on monthly mortgage payments which is doing this.