Hong Kong home prices have dropped about 30 per cent from the 2021 peak on the back of a sharp increase in interest rates that has made mortgage payments more expensive and housing less affordable. With home prices expected to fall further, the question is: should the government stop or slow down its land sales?
The answer is no: to ensure Hong Kong remains a world-class city where people can live comfortably, it should increase its property supply. Hong Kong’s housing remains among the world’s least affordable in terms of the property price-to-income ratio, despite this number dropping from 40 in 2021 to 29 now by our calculations – meaning it takes 29 years of the median income to buy a home on average. This is still far higher than for major cities such as New York (14), Tokyo (16), London (19) and Singapore (23) – though largely in line with other Chinese cities such as Beijing, Shanghai and Shenzhen (around 30).
Hong Kong’s property price-to-income ratio has worsened over the past 70 years. The number has gone from 4-6 in the 1950-1970s and 8-12 in the 1980-1990s to more than 20 since 1997. Many Hongkongers are nostalgic for the days when ordinary folk like teachers could afford to buy private flats.
Hongkongers also have less living space than people in many comparable cities. The average in Hong Kong is about 172 sq ft, compared to Singapore’s 355 sq ft, London’s 350 sq ft, Shenzhen’s 300 sq ft just across border, Beijing’s 360 sq ft, Shanghai’s 330 sq ft and New York’s 530 sq ft – it’s even smaller than the 216 sq ft average in Tokyo, known as one of the world’s most crowded cities. Indeed, an estimated 220,000 people in Hong Kong still live in subdivided flats (including cage homes) with just 40-80 sq ft per person, or even less.
The average living space in Hong Kong has barely improved from 165 sq ft since the handover in 1997. This is in contrast to the steady improvement before that: from the tiny 24 sq ft in the 1950s, to 35 sq ft in the 1960s, 40 sq ft in the 1970s, 50 sq ft in the 1980s and over 150 sq ft in the early 1990s.
Hong Kong’s gross domestic product per capita has increased by 85 per cent in that time, from about US$27,000 in 1997 to US$50,000 last year in nominal terms. But property prices also rose in the period, by 75 per cent as the average price per square foot went from US$1,200 to US$2,100, largely offsetting the income growth.
Since 1997, Hong Kong’s population has grown from 6.5 million to 7.5 million. Despite government efforts to increase housing supply, demand is expected to outstrip supply over the next five years, based on UBS property research estimates. Housing supply for 2025-2030 is forecast to reach around 300,000 units based on building permits, but demand could approach 500,000 units, taking into account an estimated 300,000 new marriages on top of additional housing needs largely driven by talent inflow.
The other wild card could be investment demand from wealthy individuals from mainland China, which is likely to accelerate amid heightened geopolitical tensions around the world.
It is worth learning from the policy mistakes of the handover period. By 2003, Hong Kong property prices had tumbled by 60 per cent from the 1997 peak. The newly sworn-in administration in 1997 promised to supply 85,000 flats a year, based on demand projections and also aimed at cooling down the then red-hot property market.
The Asian financial crisis later that year hit the Hong Kong economy hard. The Hang Seng Index fell by 65 per cent from July 1997 to August 1998 and the real estate market collapsed, leaving more than 100,000 households holding negative equity for years. Hong Kong’s government introduced a series of policies to stem the market slide, including putting aside the plan to build 85,000 flats a year and stopping land sales.
Hong Kong is a small, open economy with a unique monetary arrangement. Its property prices are extremely difficult to predict. The government’s role should be to ensure a steady supply of land and housing, both public and private, based on long-term population growth projections so as to enhance living space for the average Hongkonger – instead of switching its policies based on temporary volatilities in property prices.
Hong Kong has traditionally increased land supply through reclamation and brownfield site development. Many rural areas in the New Territories are brownfield sites. The government should expedite their conversion into residential zones, offering incentives to landowners to release underused land.
It should also take a long-term view and draw up blueprints for the infrastructure needed, including transport, sewage and community facilities such as schools and hospitals, all of which take years to materialise. To ensure more living space for Hongkongers in the long term and for Hong Kong to continue to shine as a world-class city, the government should make the strategic decision to increase housing supply now, instead of being blinded by yet another short-term property price slump.
