Hong Kong has established its real estate markets since 1841, when it became a colony of the British Empire after the First Opium War. As a small city with only an area of 1,104 square km, but over 7 millions of people, Hong Kong has one of the most prosperous property markets and which has created a huge amount of wealth.
According to Forbes list of Hong Kong billionaires 2012, the top 3 richest people and 8 out of top 11 richest people in Hong Kong are came from real estate industry. Nowadays, Hong Kong has the 3rd-most expensive real estate in the world, with an average square meter per unit pricing of US $20,371, behind only Monaco and London, according to research of Global Property Guide.
Base on the 2011 census, Hong Kong has mainly three different kinds of flats, around 30% population are living in public rental housing, around 18% population are living in subsidized sale flat, around 50% are in private housing, and remaining 2% living in other kinds of housing.
Background and history of Hong Kong Property Markets
Before 1949, early stage of Hong Kong property market
Started from 1841, the colony of Hong Kong has quickly become a regional center for doing re-exports businesses and trading with mainland China. However, due to the population size of Hong Kong was not that large before the Second World War, the property market was not very prosperous at that time.
1949 – 1980, China’s close door period
Until 1949, because of the establishment of the People’s Republic of China (PRC) and the relatively political unstable in mainland, millions of Chinese people have immigrated to Hong Kong. Some of them were entrepreneurs from Shanghai, some were well-trained professionals, and some were labor who can provide man power to Hong Kong industrialization. Because of the sudden influx of population and huge capital inflow, the demand on the Hong Kong properties has increased significantly. Even though there were some fluctuations on the price level during 1949 to 1982, say, 1970s oil crisis, but in the 30 years of China’s close door policy, Hong Kong has a significant increment on property price levels.
1981 – 1984, Property Crisis due to the issue of Hong Kong’s sovereignty Due to the approach of 1997, Chinese government started the discussion of the issue of Hong Kong’s sovereignty with British government since 1981, because of the uncertainty of the “1997 problem”, a lot of people left Hong Kong and migrated to Canada, UK, Australia or New Zealand. Due to the lack of confidence to the future and unstable political environment, the property price has dropped by 60% in the period of 1981 to 1984.
1984 – 1997, Property Market Bubble
In 1984, The Sino-British Joint Declaration was signed by Mr. Zhao Ziyang, the prime minister of PRC and Ms. Margaret Thatcher, Prime minister of UK. In the declaration, “One country, two systems” principle was agreed between the UK and the PRC. The socialist system of PRC would not be practiced in the Hong Kong Special Administrative Region (HKSAR), and Hong Kong’s previous capitalist system and its way of life would remain unchanged for a period of 50 years until 2047. The Joint Declaration provides that these basic policies should be stipulated in the Hong Kong Basic Law and that the socialist system and socialist policies shall not be practiced in HKSAR. The stabilized political situation has regained the confident of Hong Kong people, and more people were willing to invest in Hong Kong.
Most importantly, in the Joint Declaration the Chinese and British governments agreed that the British Hong Kong government would only sell a maximum of 50 hectares a year since 1984 to 1997 (excluding land to be granted to the Hong Kong Housing Authority for public rental housing). This has capped the supply of property in Hong Kong. Started from 1990s, Hong Kong has became an international finance center, major working population has shifted from participating in secondary industry into tertiary industry, such as financial services, trading etc, together with more and more foreign companies, such as investment banks, MNCs, came Hong Kong and set up their offices, which boosted up the demand of Hong Kong properties. Because of the significant increment on demand, but capped supply by the joint agreement between PRC and UK governments, Hong Kong property prices went through the roof until the burst of bubble in 1997.
1997 – 2003, Asian financial crisis and HKSAR government’s housing policy After the transfer of sovereignty over Hong Kong from the United Kingdom to China in 1997, due to the high property prices, a lot of social problems have been caused, for example, new generations felt difficult to purchase a flat. The first Chief Executive of HKSAR, Mr. Tung Chee-hua decided that the government should increase supply to curb property prices. He proposed to supply 85,000 units of residential housing (including private and public sector) every year to curb prices. With government’s push on building more flats, the private sector housing completion rose from 15,000 units in 1997 to average 20,000 units for six years from 1998 to 2003, and reached over 30,000 in 1999 and 2002.
It was not until 2003 when the government decided to leave the property market to their own device. However, at the same time as Hong Kong’s return to China, the Asian financial crisis started in Thailand has spread to Hong Kong, economy including property markets has hurt significantly by the slump. As a result of both increased housing supply and financial crisis, the property bubble went bust, the real property prices dropped by more than 40% in 1998, returning to their levels in the early 1990s. Residential property rents also fell, by 30% in real terms during the same period. Both have been weakened further in the latter part of 2000 after the bust of IT bubble.
Hong Kong Census and Statistics Department, reflecting the weakness of the market, the transaction volume also dropped sharply, with the number of sale and purchase agreements falling from over 200,000 in 1997 to less than 86,000 in 2000. Reflecting the decline in the property price, net housing equity in the private residential sector is estimated to have dropped by 53% from HK$3.7 trillion in 1997 to HK$1.8 trillion in 2000. As a ratio to nominal GDP, net housing wealth dropped from 2.8 times GDP in 1997 to 1.4 in 2000, back to the level in the early 1990s. For some households, the fall in property prices has resulted in the value of their properties falling below the size of their outstanding mortgages, which we called the “negative equity”. Negative equity has become a special and significant factor affecting the impact of property price changes on the rest of the economy.
After 2003, shortage of supply
Hong Kong SAR’s residential property prices turned around and began to grow rapidly since 2003. Since the government has decided to leave the property market to their own device in 2003, compare to average over 20,000 units of new private flats being constructed every year before 2003, an annual average of only 14,000 new private residential units were constructed from 2004 to 2012. At the same time, the supply of public housing units (including Public Rental Housing and Home Ownership Scheme units) has fallen even sharper than that of private residential units. Between 1997 and 2003, an average of 43,000 public housing units was built every year.
However, after 2003, the figure has slipped to less than 16,000 units per annum. On the other hand, between 2004 and 2011, Hong Kong registered an average of 49,000 marriages per year, according to Hong Kong Census and Statistics Department. This translates to 49,000 couples competing for 30,000 residential units every year from 2003 to 2012. Therefore, housing price level, meanwhile, grew 182% during this period.
Importance of property markets to Hong Kong
The property market plays an important role in the Hong Kong economy. Housing is the most important form of savings for many households, a significant drop in housing prices, for example the 1997 property crisis, the fall in property prices has resulted in the value of their properties falling below the size of their outstanding mortgages — the problem of negative equity, this would further cause economic problems in areas other than housing sector. In the banking sector, currently about half of domestic credit comprises mortgage loans for the purchase of private residential properties and loans for building and construction, property development and investment.
Changes in property prices and rents influence consumer price inflation, and affect Hong Kong’s competitiveness. To government revenue, land sales and stamp duties on property transactions have also been a significant source of income, which contributed around 25% of total government’s revenue. The major reason behind Hong Kong’s low tax rate is because a large part of government’s expenditure is supported by income from property related income. Considered the importance of property markets to Hong Kong economy, a significant fall in property price level would cause a huge impact to Hong Kong’s economic structure.
Interest rates and Hong Kong’s linked exchange rate
As a response to the Black Saturday crisis in 1983, the linked exchange rate system was adopted in Hong Kong on October 17, 1983 through the currency board system. A linked exchange rate system is a type of exchange rate regime to link the exchange rate of a currency to another. It is the exchange rate system implemented in Hong Kong to stabilize the exchange rate between the Hong Kong dollar (HKD) and the United States dollar (USD).
According to Paul R. Krugman’s “The Impossible Trinity” theory, in the international economics, it can at maximum only fulfill two out of three followings at the same time: a fixed exchange rate, free capital movement, an independent monetary policy. Since Hong Kong has a fixed exchange rate between HKD and USD, and also a free capital market, as a result, it is obliged to import monetary policy from the US, and adjust the interest rates, including mortgage interest rate, according to US Fed’s decision.
Forecast of Hong Kong property prices
Demand and Supply
As mentioned previously, from 2004 to 2012, there were average 49,000 marriages each year. We assume that number of marriage represents the demand of housing, and also assume the number of marriage each year would remain constant in coming five to ten years. On the other hand, the supply of housing in coming five years is estimated to be around 35,000 new flats each year, which includes 15,000 public housing every year, (according to government policy address issued on 16 Jan 2013), and around 20,000 private housing every year, (according to the market estimation). This means the demand of housing is still exceed the supply in future five years.
Low cost of capital
Secondly, due to the fixed exchange rate between HKD and USD, Hong Kong should keep its interest rate in line with US, as US has implemented QE to boost its economy, therefore, the cost of capital, which is the critical part of mortgage borrowing, would remain very low at least in coming two years. Finally, according to
Health mortgage structure
According to Hong Kong Monetary Authority (HKMA), Quarterly Bulletin, Hong Kong retail banks’ overall loan-to-deposit ratio was 55.0% at the end of September, which is very low compare to the figure as at 1997, which was about 150%. Also, the credit quality of HKMA surveyed institutions’ residential mortgage lending continued to be sound, with delinquency ratio continuing to hover at 0.01% at the end of the third quarter 2012. With higher residential property prices, the surveyed institutions did not report any residential mortgage loans in negative equity at the end of the third quarter 2012. Furthermore, base on Hong Kong Census and Statistics Department, on average, the mortgage repayment represented 25% to 30% of household income, which is still within a health range.
Potential buyers from mainland China
With the economic growth of mainland China, more and more billionaires from mainland are interested to buying property in Hong Kong. According to the survey conducted by Centraline Property, the largest property agent in Hong Kong, mainland customers contributed 10% of the total property transactions, and they were extremely interested in luxury housing, and it is expected the number of mainland customers will further increase in coming few years.
Consider the factor of demand and supply, low interest rate, mortgage condition and future extra demand from mainland customers, it is expected the property price level in Hong Kong would still remain at a high level in coming years.