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Hong Kong homes the least affordable in world

HONG KONG: Homes here are the least affordable among the world's major cities and are rapidly becoming less affordable — a fact buyers may find to their cost when interest rates rise.

This is shown by an international comparison conducted by a US consultancy at the request of the South China Morning Post, and Hong Kong government figures.

A university professor specialising in real estate warned that a "short-term illusion" of affordability had been created by very low mortgage interest rates, which would evaporate when rates rose to a more realistic level — possibly as early as next year — pushing up mortgage payments.

The survey found Hong Kong people pay more than 10 times their annual income to buy a flat, the most of 272 metropolitan cities and earning it a "severely unaffordable" rating along with London, Sydney and New York.

This was backed up by Hong Kong government statistics which showed buyers paid 8.5 times their annual income for an average-sized flat in the last quarter of last year — up from 7.6 times in 2Q, an increase of almost a year's income in six months.

Despite this, Hong Kong buyers pay less of their annual income on mortgage payments than some of the other most expensive cities — 44%, according to the survey, and 38.1%, up from 34% in 1Q, according to government figures.

Chau Kwong-wing, chair professor of the real estate and construction department at the University of Hong Kong, said the big jump in flat prices and a mild increase in mortgage payments illustrated that interest rates of just 0.8% to 2.1% were making housing look affordable.

"But it is just a short-term illusion. People think they can afford an expensive flat with a reasonably cheap mortgage," he said. "Their dreams will burst and the flat will become unaffordable when the interest rate rises."

Public policy consultancy Demographia, in an annual survey conducted for the past six years, compares housing in 272 metropolitan centres in six countries — the US, Canada, the UK, Ireland, Australia and New Zealand — dividing median house prices by gross annual median household income to arrive at an affordability rating.

This year, at the request of the Post, the survey's co-author Wendell Cox extended the survey to cover Hong Kong using data from the Land Registry and the Census and Statistics Department.

Hong Kong's rating of 10.4 was based on a median flat price of HK$2.18 million (RM899,000) and median annual income of HK$210,000. That was more than double the five at which the survey ranks a city "severely unaffordable". Three or less is rated affordable and four is deemed "seriously unaffordable".

Cox admitted that different taxation systems could affect the calculation, but the general nature of the categories avoided factors affecting the survey results.

"Median price is by far the best indicator of house price because it is the middle value and reflective of the middle of the market. Average prices are very susceptible to upward skewing from more expensive properties," he said.

In another calculation, Cox followed the Hong Kong government's assumptions — a 20-year mortgage and 30% down payment — to calculate the proportion of income needed to pay the mortgage. He found Hong Kong was higher than New York and London but less than Sydney and Vancouver.

The affordability rating from the Financial Services and the Treasury Bureau is based on the average price of a private flat with a saleable area of 45 sq m. After last year's rapid increase, it now exceeds the 20-year average of 7.5 years but is still well below the 12.3 years at the market's peak in 1997.

Chau said the abrupt rise sent a warning signal despite the government's repeated comforting words that it was still far below the peak.

"The 1997 figures are historically high. It isn't a reasonable benchmark for comparisons," he said. "In fact, the prices of some luxurious apartments have already exceeded 1997 levels by about 10%."

Chief economist at the Asian Development Bank Lee Jong-wha warned last week that Hong Kong was at risk of forming a property bubble.

Calculations by one property agency have indicated that a 5% increase in interest rates would push some households' repayments over 48% of their income.

Chau said he expected interest rates to rise next year or the year after as the global economy recovered.

He said speculation on flats had already spread from luxury housing to cheaper flats in the New Territories.

Centaline associate director Wong Leung-sing said some sales at Taikoo Shing had already exceeded 1997 levels, selling at HK$11,000 to HK$12,000 psf last month. He expected
City Garden in North Point, now selling at HK$7,600 psf on average, would soon break the 1997 record of HK$8,100 psf.

"For young graduates who really want to own a flat, they should go for second-hand flats," Wong said.

Democratic Party lawmaker Lee Wing-tat said the stabilising measures announced by the government last month were inadequate.

"Developers can sell flats at high price because people do not know if there will be sufficient housing supply in the future market," he said. "The government should handle the market anticipation by increasing land supply for sales."

As a measure to increase housing supply, the Development Bureau announced in February that it will reserve six sites for auction if no land is triggered for sales in the following six months. But Lee said the six sites would provide only 2,200 flats, contributing only a small portion of an average annual demand of 20,000 flats.

Chau urged the Lands Department to increase land supply and disclose the minimum price for triggering land sales. "A more transparent land sales system would dismiss irrational fears," he said. "Buyers would be reassured if they know at what price a site could be triggered for sale. They wouldn't rush to buy a flat."

A government spokesman said the Hong Kong administration would continue to closely monitor the situation and would take further measures when necessary. He added that cities had different economic characteristics but did not comment on Hong Kong's ranking in housing affordability. — South China Morning Post
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