Hong Kong’s housing bubble: Twenty years ago, well-heeled Hong Kong buyers found Shanghai properties a bargain. Now, the once-poor cousins on the other side of the border are snapping up Hong Kong apartments.
Hong Kong looks ripe for a housing bubble. The interest rate on mortgages is effectively set in the United States, thanks to the Hong Kong currency peg with the US dollar. That means rates as low as 2 per cent. Buyers can put down as little as 5 per cent of the purchase price, thanks to intense competition among credit providers.
The government is concerned. It raised the buyer’s levy on luxury apartments on Wednesday, but only from 3.75 to 4.25 per cent. It could cool the market more by offering a large amount of new land, but it does not want to jeopardise the revenues from land auctions. Nor is it willing to restrict the free flow of funds from the mainland.
Those funds are flowing quite freely. Mainland buyers now account for 15 percent of individual buyers, and 21 percent of demand for units costing more than HK$10 million ($1.29 million), according to a survey by Nomura. To them, Hong Kong prices look reasonable. In Shanghai, the typical monthly mortgage payment on a medium-sized flat is equal to106 percent of the average monthly income, according to CICC. That ratio is only 34 percent in Hong Kong, according to the Hong Kong government. Mainland properties also look more stretched by measures such price-to-income and rental yields. The Chinese mortgage market is tighter than that of Hong Kong. Most buyers pay more than the mandatory 20 percent down payment. Interest rates are also higher. Even first-time buyers, who enjoy a 30 percent discount, paid more than 4 percent in 2009. Still, mainland Chinese buyers seem to have fallen for the lure of leveraged housing investment. The total value of mortgages surged by 48 percent in 2009.
Hong Kong residents, who have seen a bust before, might scoff at the extravagance of the mainland interlopers. But the purchasers looking at Hong Kong are rational in comparison with those still swarming into Chinese properties.