Workshop on Social Model, PolyU Hong Kong 29 Nov 2013 HK Monetary Policy and Housing Affordability by Dr Edward CY Yiu Associate Professor Dept of Geography and Resource Management, Chinese University of Hong Kong 1
5 Features of HK Housing Market Land supply is very limited and is at the discretion of the government; Housing prices are extremely volatile; The average price appreciation rate is among the highest in the world; Developments are concentrated among a few large developers; The public housing sector is the second largest in the capitalist world. (Lai and Wang, 1999) Why? 2
Land Use Area (ha)- SIN v HK 2010 SIN 2012 HK Res. 10,000 (14%) 9,760 (9.5%) Ind./Com. 9,700 (13%) 2,300 (2.1%) Green 5,700 (8%) ~73,000 (66%) GIC 5,400 (8%) 3,700 (3.5%) Total 71,000 109,200 Land is NOT limited by is at the sole discretion of the government.
Modest overall density, but very high urban density of HK.
Population and Households HK Year Population No. of Households Ave Household Size Mid 1983 5,345,100 1,334,300 4.01 Mid 1993 5,919,000 1,677,700 3.53 Mid 2003 6,731,000 2,081,000 3.23 Mid 2013 7,184,000 2,420,800 2.97 Strong growth of population and number of households
Housing Stock HK Year Private Housing Subsidized Housing Public Rental Housing Total Housing Stock - Households 1983 542,000 36,000 533,000 1,111,000-239,000 1993 833,000 186,000 677,000 1,696,000-10,000 2003 1,258,000 395,000 679,000 2,332,000 251,000 2013 1,458,000 391,000 766,000 2,616,000 195,200 Fast increases of both public and private housing stocks, from shortage to surplus
Then, Why HK still Has Housing Problems? Unaffordable Housing; Subdivided Flats and Coffin Rooms; Dilapidated Buildings and Walled City. 7
Country/ city GDP per Capita Ave. Living Area (sf) Per Person (sf) US 51,704 2,476 ~800 Taiwan 38,357 1,119 ~370 SIN 60,799 1,044 323 Tokyo 35,855 667 ~220 Shanghai 9,055 560 194 HK 50,936 452 161 Ave per person living area of HK = 0.5 of SIN
Unaffordable Housing Median to Median International Std 2012 HK Price to Income Ratio Rent to Income Ratio < 6 15 < 30% 37% A decent housing in HK is unaffordable
Price to Income Ratio: HK 2011 = 12.6 SIN 2011 = 4.4
Decade s Mortgage Tenure Max LTV Max Tenure HPI MTI Ratio 1970s 90% 10 yr 20 NA 1990s 70% 20 yr 100 110% 2000s 70% 25 yr 60 20% 2010s 50% 30 yr 126 56% 2030s? 40 yr???
Mortgage-to-GDP Ratio Asia Moderate MTGR: MTGR of HK grew from 30% in 1996 to 50% in 2002; then dropped to 30% in 2007, back to 45% in 2013. MTGR of China is just 17% in 2012. MTGR of Singapore increase from 20%- >40% in 13 years http://www.dbs.com/insights/conference/2013/slides/isthereapropertybubble_andhowtospotone.pdf, http://research.stlouisfed.org/publications/es/13/es_13_2013-05-03_chart.pdf, http://ecyyiu.wordpress.com/2013/07/27/household-debt-to-gdp-ratio-and-mortgage-loan/ 12
Housing Price Volatilities +60%,-40%! Global #1 Increase 2012 13
Government s Roles in the Housing Sector Govt cannot let housing price drop Bank Risk Users (Quarters) and Facilitators (Loans) BANKS / HKMC Income Monetary Policy Sole Land Supplier (18% land sale income excl. other related taxes) Govt s Roles in Housing Market Negative equity and unemployment Biggest Developer and Housing Owner (Public Housing) Private Housing Market HOS (by lucky draw) PRH (by queuing) Policy Maker and Law Enforcer 14
Asian v. Western Approach Asian approach direct, planned economy: (lower risk but costly and inefficient) Government builds and provides shelters to the needy Provide home rental or buying subsidy; China Singapore (80% in HDB) Hong Kong (50% in PRH, HOS, TPS) Western approach indirect, financial engineering: (efficient but risky) Provide mortgage loan subsidy; Housing inclusion and tax relief; Deregulation and securitization. MBS REITs 15
Homeownership Ratios in Asia 2013 Singapore: from 29% in 1970 to 92% in 2000; China (urban): from 17% in 1985 to 82% in 2010; HK: 35.1% in 1986 to 51.3% in 2013 (Target was 70%, TPS in 1997). Ronald and Elsinga (2012), Census and Statistics Department, HKSAR http://www.joneslanglasalleblog.com/apresearch/residential-research/chart-of-theday-home-ownership-rate-in-china#.ums3onbyyuk 16
Homeownership Makes Citizens Under Control the Thatcher governments utilised increasing levels of home ownership as a means of making citizens responsible consumers by exposing them to the outcomes of monetary policy. Perhaps now the credit crunch is another realisation of this policy. (Rowlands, 2010) 17
How HK Monetary Policy Affects Housing Price? Currency Board Arrangement Currency exchange rate is fixed! Linked Exchange Rate (peg) US$1 = HK$7.8; Interest rate is fixed! If the rate does not follow the US's, arbitrage can make no-risk profit!! (carry-trade) Inflation does not follow Economic conditions very different from the US; When the economic conditions are opposite, then Either a LOW INTEREST RATE + HIGH INFLATION; Or a HIGH INTEREST RATE + HIGH DEFLATION.
Negative Correlation of Real Interest Rate & Housing Price Casual observations confirmed the negative relationship hypothesis: 1996 2001 2006 2011 HIBOR % 5.48 3.44 4.21 0.27 CPIA yoy % 6.31-1.60 2.03 5.51 RIR -0.83 5.04 2.18-5.24 HPI (yr end) 134.5 73.8 93.8 181.1
RIR v. HPI yoy of HK
RIR v. HPI yoy of HK
A More Robust Empirical Test 2010 JFMPC 14(3), 257-270
Implications of Neg. RIR Saving in cash is a net loss; Borrowing to invest in housing is costless; Monthly mortgage payment < Monthly rent; The risk of loss is capped by government bailout; Who can borrow more determines who can earn more; Low interest rate in the US usually accompany US$ drops; If US$ drops, foreign investors can earn both capital gain and currency gain, by buying HK housing units.
The End comments are welcome. Enquiries to: ecyyiu@cuhk.edu.hk 24