New government should revise existing cooling measures
According to JLL's latest white paper - Up, Up and Away: The Rise and Rise of Hong Kong's Residential Market, JLL expects Hong Kong's housing prices to grow 15% in the coming 30 months given strong demand from owner-occupiers and about half of all households still with the financial strength to participate in the secondary market. If the government's cooling measures remain in place, the deadlock in the secondary market will funnel home seekers into primary market, further lifting up prices.
Cooling measures have failed to curb price growth
The government has announced an array of new policy measures to curb demand since 2009 in an effort to control prices. Earlier in the upcycle, the government managed to tug the tether on speculative demand, with confirmer sales now accounting for no more than 0.1% of sales volumes, compared with 6.0% back in 1997. Yet at the same time, the significant upfront transaction costs in the form of stamp duties and lower Loan-to-Value (LTV) ratios has also made it more difficult for bona-fide end-users to trade up in the market. This has led to monthly home sales plummeting by about 60% to a low of 4,200 in 2013 from an average of 11,300 in 2010. The government's all-or-nothing approach has failed to stop prices from rising; effectively doubling since 2009.
Strong housing demand
Our analysis shows that since 2010, transaction volumes have not been able to match the number of marriages and local births, with the ratio of residential sales to household formation currently standing at 0.5, about 45% below long-term trend levels. This implies that a large amount of demand has not been met. With still plenty of pent-up demand in the market, housing prices will continue to be well supported.
Affordability remains grounded
Whilst Hong Kong's current price-to-income ratio stands at 17.3, ranking the city as the world's least affordable housing market, the current Debt Servicing Ratio (DSR) or the amount of monthly household income apportioned to servicing mortgage repayments stands at just 47%, which is still a tolerable level. Our analysis shows that around 1.27 million households with an income over HKD 28,000 per month can afford to buy private housing using a combination of savings and financing 70-80% of the balance through banks, non-banks and the Hong Kong Mortgage Corporation. This suggests that at least half of all households can afford to participate in the private housing market. Although this is less than the 70% recorded in 2006, the number of households that are able to afford to buy is still greater than the total private residential stock of 1.16 million units.
Primary supply not enough to burst property price balloon
Between 2017 and 2020, the market should see a 94% uptick in supply, rising to 21,000 units from the annual average of 10,800 units recorded between 2007 and 2016. However, supply will remain substantially below the annual average of 25,100 units recorded between 1992 and 2006. Moreover, developers are building a greater number of smaller units to cater for the mismatch between what households can afford and the availability of small-sized units in the market. The average size of new flats currently under construction stands at about 600 sq. ft, 25% smaller than that of 800 sq. ft in 2015, and is the smallest since 2001.
Joseph Tsang, Managing Director at JLL said, "Under the existing cooling measures, the secondary sales market is facing a deadlock, which funnels more home seekers to the primary sales market. Should there be no changes to the status quo, a price fall in the near future is unlikely,"
He suggested: "The new leadership of the government should revise its existing policy measures for new dynamics to form in the primary and secondary markets. The government could relax the Double Stamp Duty and LTV measures in the secondary market, which would in turn free up the 1.16 million of private residential stock. The larger pool of flats available for sale should restrain developers from aggressively pushing primary prices higher. In the long run, this would provide buyers with more purchasing options, ease pricing levels and promote a healthier development of the property market."
Ingrid Cheh, Associate Director of Research Department at JLL also commented, "While Hong Kong's housing market is currently at an elevated position, we do not believe that rising interest rates alone will be enough to tip the market over. There still exists a significant amount of pent-up demand to be satisfied in the market. In view of the current business cycle, we expect the housing prices to climb another 15% in the coming 30 months."