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Only a very small number of people would ever be able to afford normal mortgage conditions at the prices Hong Kong's property market has now reached. Photo: Bloomberg
Opinion
Jake's View
by Jake Van Der Kamp
Jake's View
by Jake Van Der Kamp

Its official: Hong Kong's top leaders say nobody should buy homes

Under normal interest rate conditions few Hongkongers could afford loans at current flat prices

 

 

 

Much as I respect the great English wordsmith, William Shakespeare, he didn't deal much in interest rates, ratios and prices. Sometimes pictures say more than words.

Thus to the chart. The blue line at the bottom sets out the Centaline Property Agency's affordability index for small and medium-sized flats. It represents an estimate of the percentage of average household income that must go into servicing a mortgage for an average flat at present prices, mortgage interest rates and down payment terms.

Centaline's figures say that at the peak in mid-1997 this was 86 per cent of household income, a very high figure, but largely attributable to a panic spike in interest rates.

As our property market then collapsed this ratio fell to a low of only 17.5 per cent in July 2003, and from there has steadily risen again to 49 per cent at present, still well below that 1997 peak.

And now to the red line at the top of the chart. This represents the government's index of flat prices for homes of 40 square metres or less of floor area.

For the purpose of comparison with the affordability ratio I have rebased this index to a value of 86 for June 1997, the same as the peak of the affordability ratio.

The gap between the two is obviously enormous. The price index now stands at more than three times the value of the affordability index.

And the reason for the difference is almost entirely interest rates alone. Because of our link to the US dollar, we have become victims of irresponsible monetary policy in the United States and our interest rates have been pushed to ridiculously low levels along with US rates.

This changes everything for affordability. Interest rates are by far the biggest determinant of residential property prices.

Push interest rates down and you don't get cheaper mortgages. You just get higher property prices as the market adjusts to its real price indicator, the size of the monthly mortgage payment.

But let's assume that mortgage rates were to return to more normal levels, which would be at least 300 basis points higher. For a HK$7 million flat with 80 per cent financing (it will inevitably be more than the official 60 per cent maximum), the extra cost would work out to HK$14,000 a month.

This extra alone is more than the HK$13,500 official figure for average monthly employment earnings at present.

Now let us put all of this into context. Our chief executive says interest rates will go up in the future while his financial secretary warns people not to buy property if there is a prospect in years to come that they will not able to afford it.

But only an insignificantly small number of people would ever be able to afford normal mortgage conditions at the prices our property market has now reached.

Thus what the two leading officials of our government are now telling us, unless they are talking at cross purposes again, is that no one should buy residential property at all.

It is what you are saying, Johnny. Will you say it directly?

This article appeared in the South China Morning Post print edition as: Are HK officials saying that nobody should buy homes?
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