Prices of second-hand homes have risen to a level 2 per cent below their record high. Photo: Bloomberg

Rise in housing prices renews debate on affordability

Analysts say household affordability not the reason for higher property values but rather the imbalance between supply and demand

Housing affordability is back in focus as property prices in the city show signs of picking up.

According to BNP Paribas, indicators of housing affordability are stretched as household incomes have risen at a much slower pace than home prices.

The price-income ratio, which the investment bank defines as the average price of a typical 50 sq metre flat to the median income of households in private housing, is about 14 - the level last seen before the onset of the Asian financial crisis.

Some analysts say this measure does not reflect the wealth in the market. They believe affordability may not be a key factor driving home prices, which is more often caused by the imbalance between demand and supply.

Prices of second-hand homes have risen 1.78 per cent so far this year. They are now 2 per cent below the market's record high in March last year but still 3.42 per cent higher than the intrayear low in March this year.

BNP Paribas said in its research report prices had been "flat to down" over the past 12 months because of the cooling measures introduced by the government in October 2012.

Real estate prices had more than doubled between 2008 and the middle of last year, prompting the curbs.

"Since the outbreak of the global financial crisis, nominal property prices have grown at an average of 16 per cent per year, while nominal median household income has grown at just below 4 per cent per year," the investment bank said in the report.

If affordability ratio is so stretched, why is the demand still so strong?

When the favourable factors - such as low interest rates and heavy hot money inflows - fade and buoyant supply comes on the pipeline, downside risks will dominate, it says, predicting a 20 per cent drop in property prices by the end of 2016.

Cusson Leung, the head of property research at JP Morgan, agreed that affordability was a problem, but said: "If the affordability ratio is so stretched, why is the demand still so strong?"

According to the Land Registry, property transactions including residential and commercial, hit 7,404 last month, up 9.12 per cent from May.

JP Morgan, which last year predicted a 25 to 30 per cent fall in home prices this year, has revised the downside risk to 5 per cent, or even less. The change of view was prompted by higher-than-expected demand and the prediction that the government would fail to ensure the targeted annual supply of 20,000 homes per annum in the next few years.

Leung said there was a flaw in the calculation of the affordability ratio, which JP Morgan defines as monthly mortgage to monthly household income.

Leung said the ratio failed to measure the amount of wealth in the market that buyers could easily make use of to pay for a larger down payment.

"Why is there so much wealth? It is because in the private housing market alone, 720,000 residential units are completely debt-free. This is the reason why the affordability measures are not really that useful nowadays," he said.

"Assuming affordability is a useful measure in pointing out that homes are very expensive, but expensive is not the reason why prices should fall. In many other cases, high price does not mean prices will fall. Prices are expensive as a result of a demand-supply imbalance."

Centaline Property chairman Shih Wing-ching, who has been expecting a slowdown in the property market, recently said demand was stronger than he anticipated.

A rebound has been triggered by a recent concession on double stamp duty, which was part of the cooling measures announced earlier. Under the concession, those upgrading to a better home get more time to sell their existing homes in order to claim a refund of the additional stamp duty, giving them an incentive to buy.

This article appeared in the South China Morning Post print edition as: Price rise renews debate on wealth