Crazy talk about property prices back to normal


Now that Hong Kong property prices have moved from the outer stratosphere to rest precariously on Planet Fantastic, there is much loose talk about a move back in the direction of the ridiculous. New World Development, one of the colony's big property developers, has just forecast that prices will rise again by some 10 per cent in the coming year.

The ever bullish Michael Green from the Nomura Research Institute in Hong Kong goes further. He believes a serious supply shortage is about to emerge which will send prices back up to the crazy levels which people in the colony describe as "normal".

What are we talking about? According to the Hongkong Bank, the average price of a 430 sq ft flat, in other words a flat much smaller than practically all council flats and built to far lower specifications, is now around HK$1.68m (pounds 142,000). A flat approaching the size of a average three bedroom apartment in London would cost at least pounds 400,000. Office rentals, which have fallen more sharply than residential prices, remain as high as pounds 8,500 a month for 1,000 square feet in the central district. Companies moving out of the prime area have been able to rent an equivalent office space, a couple of miles away, for some pounds 2,500 a month.

The high prices have driven many companies out of the territory in search of lower costs in places such as Singapore. It was thought the laws of supply and demand would kick in about now and start to pull prices down. The fact that Chinese rule over Hong Kong will start in less than 600 days might also have been thought to act as a depressant on prices. Even on the supply side there are reasons to suggest that demand might be satisfied.

At the end of last month the government let it be known that the supply of land for the construction of residential property could hit a record this year. The increased land supply is mainly derived from development sites surrounding the rail link to Hong Kong's new airport and is in line with the general policy of releasing more land for residential development.

The government is Hong Kong's sole freeholder and supplier of land. It creates supply by redevelopment, redesignation and reclamation work. However the government cannot determine the rate at which developments actually take place. Research by the Nomura Research Institute shows that consents to commence work on residential buildings have slumped to a 30-year low. Consent issue is down by 73 per cent since the boom days of late 1992.

At first glance it might be thought that developers are losing confidence and are therefore reluctant to proceed with projects, while downward price pressures would be accelerated by greater supply. Nomura's Michael Green argues that the slowed rate of development will lead to a short-term critical supply shortage, producing yet another boom in residential prices.

Mr Green may well be right if it turns out that demand is primarily a function of the need for living space, rather than a reflection of the investment prospects for property and the availability of funds to finance these investments.

However, a set of figures from Hongkong Bank seems to indicate that demand will remain depressed as the affordability ratio remains stubbornly high at some 95 per cent. This figure is calculated by comparing median household incomes with the average mortgage repayment required for the purchase of a 430.5 sq ft flat. The affordability ratio is more or less unchanged from 1992 and early 1993 when property prices reached their last peak.

This calculation is slightly problematic because it takes no account of existing property owners investing the proceeds of a previous property sale in a new purchase. However, as a general indication of what can be afforded, it is a useful exercise. If the average British family were required to stump up such a high level of mortgage repayment, the British property market would go from being flat to comatose, but in Hong Kong people seem to have access to money derived from all sorts of sources which are hard to pin down.

It is also worth pointing that, in an attempt to draw some of the speculative pressure out of the property market, the government strong-armed the banks into imposing a 70 per cent limit on mortgage advances, meaning that buyers have had to scrape around to find 30 per cent of the money required to make a property purchase. In Hong Kong, properties over 10 years old are considered to be ancient, so most banks offer a lot less than 70 per cent of the cost on these properties.

Frustrated by this restriction, some developers have started offering finance schemes of their own which tiptoe round the government's limit. These schemes, and an easing of prices, have brought buyers back into the famous queues that used to greet every new development regardless of quality.

With property counters accounting for almost 27 per cent of the stock market's capitalisation - and far more in real terms because practically every listed company has substantial property holdings - the fortunes of the property and stock markets are inextricably linked.

As matters stand property companies are restraining the growth of the market as a whole. However, property counters are showing new signs of life. More importantly, most of them are not so highly geared as they were during the last property crash of the early 1980s and so there are few takers for the theory that another property crash is looming.

Logic-defying as it may be, what is happening is that prices are settling down at a level which is merely crazy rather than absurd, and the likelihood is that property values will move up again soon, but not necessarily in excess of inflation, which is now hovering just below 10 per cent.


Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

£16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

SThree: Experienced Recruitment Consultant

£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

Day In a Page

Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

Cameron lowered the flag for the dead king of Saudi Arabia...

But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Humanity must be at the heart of politics, says Jeremy Corbyn
Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

Joe Biden's 'tease tour'

Could the US Vice-President be testing the water for a presidential run?
Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

Britain's 24-hour culture

With the 'leisured society' a distant dream we're working longer and less regular hours than ever
Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

The addictive nature of Diplomacy

Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

Fashion: Ooh, Lady Chatterley!

Take inspiration from DH Lawrence's racy tome with equally racy underwear
8 best children's clocks

Tick-tock: 8 best children's clocks

Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

Charlie Austin: ‘If the move is not right, I’m not going’

After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones