Putting the house in order

Housing affordability in Hong Kong is a more acute problem than anywhere else in the world. Where else but in Hong Kong would the cost of a tiny flat gobble up every dollar an average family earns over 17 years?

 

The median price of a residential home averaging less than 600 square feet in Hong Kong is HK$4.8 million, while the median annual household income is HK$282,000. According to the US-based research agency, Demographia, it would take 17 years to accumulate enough money to buy a house (using every dollar earned) — nearly more than double the time it takes to buy a house in New Zealand, which ranks second on the list of countries and regions where housing has become unaffordable.

 

Experts hold that the root of the problem lies in well-intentioned but uncoordinated government policies.

 

Investing money equal to under three years of total family income to buy a house is close to the accepted international standard. House prices in Hong Kong had dipped to that level in 1999, during a severe economic recession brought on by the Asian financial crisis. Housing prices since then have never met the standard for affordability.

Data from the Rating and Valuation Department and the Land Registry shows housing prices have spiraled out of control since they began climbing steadily 2004 onwards, not counting 2008, the year the global financial crisis began.

 

“Housing unaffordability has reached an unprecedented level in Hong Kong,” concludes Professor Rebecca Chiu Lai-har, head of the University of Hong Kong’s (HKU) Faculty of Architecture. “This is shown by the fact that local residents are finding it increasingly difficult to afford the down payment on residential properties,” said Chiu.

 

In 2013 Citibank commissioned a survey of 1,014 people, aged between 30 and 40, in the income bracket HK$20,000 to HK$50,000. It was found that more than 71 percent rented a flat or had a mortgage that consumed 44 percent of their monthly income. Most home owners are saddled with long-term mortgages that lock them in, so they are unable to move on to newer, larger or higher-quality homes.

 

While the costs for housing, food and other necessities of life have soared over the past decade, median household income has been stagnant. Meanwhile, housing affordability crashed. According to the Centre for Quality of Life at the Chinese University of Hong Kong (CUHK), in 2002 an average family would pay 4.68 years of total family income to buy an average house, while in 2013 a family would have to invest 14.19 years of total income.

 

Rising housing costs have caused a massive shift of wealth and a knock-on effect that has eroded the living standards of a substantial part of the population.

 

Those who earn more than the government limit for public rental housing eligibility are forced to rent in the private market. Many unable to afford private accommodation move into flats that have been partitioned into cells shared with two or more families.

 

Edward Yiu Chung-yim, associate professor at the Geography and Resource Management Department of CUHK, added that housing costs may have contributed to the widening wealth gap of the Hong Kong society.

 

“Hong Kong’s salary increase has been far less than the skyrocketing property prices and private rentals. Those who paid off housing mortgages before the increase of property price have benefited from increasing equity. Those who didn’t own a house suffered from the exorbitant housing costs,” said Yiu.

Hong Kong housing affordability ratio and home price index 2000-2014

Source: Centre for Quality of Life, CUHK; Rating and Valuation Department

*In this graph, year 1999 equals 100 for three indices. For example, if the real rental index in 1999 was 100, it was 79.67 in 2003.

Number of years needed for average family to pay off a decent home

Source: Centre for Quality of Life, CUHK

Widening wealth gap

According to the Census and Statistics Department, the proportion of households earning less than Hong Kong’s median household income has remained largely the same over the past decade, at 47.8 percent. The proportion of households earning between HK$20,000 and HK$79,999 a month decreased from 46.1 percent in 2001 to 45.2 percent in 2011. Those having household incomes of more than HK$80,000 a month increased from 6 percent of the population in 2001 to 7 percent in 2011.

 

The wealthier the households, the more they are able to purchase additional properties for investment.

 

Currently among Hong Kong’s homeowners, roughly 77 percent own only one property. Eddie Hui Chi-man, professor at the Department of Building and Real Estate, Hong Kong Polytechnic University (PolyU), said most homeowners owning one to two properties are not really speculators.

 

Hui added that the gap between homeowners and non-homeowners continues to be the source of a major social conflict today, even though the proportion of homeowners has increased over the last decade from roughly 44.5 percent to 51 percent at the moment.

 

The class conflict between homeowners and non-homeowners became conspicuous in the wake of the 1997 Asian financial crisis. Homeowners watched helplessly as property prices nosedived, while non-homeowners benefited from the relatively low rent and an increased supply of subsidized housing.

Hong Kong’s middle class has become more stratified than before, having different housing needs. There are middle-class people who cannot afford the down payment on a private housing unit. There are those paying their mortgages on a tiny flat but may not be able to afford bigger spaces when their families grow.

 

“Those who save up enough to be able to afford a better private unit are not in the majority. We’re talking about an extra HK$3 million or HK$4 million. That is a quantum leap,” said Hui.

 

One might ask if these families might be able to obtain a second mortgage. The answer is, it is not easy.

 

In recent years, the government has made relentless efforts to curb short-term property speculation from both overseas and local investors, making way for those in real need of housing. Some of these measures have successfully curbed short-term speculation, at the same time acting as a deterrent to families wishing to purchase a bigger property.

 

The Double Stamp Duty, for example, was introduced to enforce heavy taxation on those investing in a second property. It was intended to discourage people with greater financial resources from purchasing second properties solely for short-term investment or generate income from rents.

 

There are tens of thousands of homeowners owning more than two properties. But it hinders other people, especially the middle classes living in smaller units, to move to larger units as their families grow. That is the effect of the Double Stamp Duty if they use their current homes as equity in order to obtain bank loans.

 

The lower middle class — often regarded as the sandwiched social class — do not consider themselves any luckier than those living in public housing estates, with hundreds and thousands of them trying to get into the government’s subsidized Home Ownership Scheme (HOS).

Pushed into subdivided flats

Then there are the poor families not poor enough to be eligible for public rental housing. Many of them would never be able to raise enough to buy a home or even rent a decent flat. They end up renting bed spaces, spaces in subdivided apartments, cage houses and even rooftops.

 

Yiu, who is also the associate director of the Centre of Land Resource and Housing Policy at CUHK, published a survey of 66 Hong Kong families currently living in subdivided apartments in June. These families were paying 41.1 percent of their monthly income as rent on an average — a sharp increase from 29.2 percent in 2013, according to a survey by the government’s Long Term Housing Strategy Steering Committee.

 

Yiu’s survey also found that the spaces rented in subdivided flats have shrunk, from 67.6 square feet per person in 2013, to 47.8 square feet per person in 2014, much smaller than the minimum of 70 square feet per person enjoyed by people living in public rental housing.

“Tsang learned the lesson from Tung, his predecessor, that building too many housing units might affect the financial standing of homeowners. He stopped building private as well as public rental housing units. Tsang went to the opposite extreme and it turned out to be a huge blunder.”

Chung Kim-wah, associate professor,  Department of Applied Social Sciences, Hong Kong Polytechnic University

Meanwhile, the demand for a space in public housing estates keeps growing. The supply of public rental housing units has dwindled over the past decade, leading to a backlog of applications seeking a space in them, said Chung Kim-wah, associate professor of the Department of Applied Social Sciences at the Hong Kong Polytechnic University.

 

Tung’s well-intentioned plan to create a massive supply of housing, was criticized by people who already owned homes, as the initiative caused housing prices to plummet. Nevertheless the move helped hundreds of thousands of Hong Kong people to find affordable accommodation in public rental housing units, at an extremely low rent, said Chung.

 

The total number of applicants queuing up for public rental housing estates fell drastically in 1997, picking up again after 2005.

 

“During Donald Tsang’s terms, there wasn’t a clear plan to build public rental housing units,” said Chung. “Tsang learned the lesson from Tung, his predecessor, that building too many housing units might affect the financial standing of homeowners. He stopped building private as well as public rental housing units. Tsang went to the opposite extreme and it turned out to be a huge blunder.”

 

Chung added that when the property prices and rental continued to climb exponentially, the financial crisis of 2008 and 2009 weakened the confidence of the general public in the city’s economy, pushing more people to apply for public rental housing.

Increasingly, younger people apply for public rental housing, even prior to graduation from university. In 2005 the government started a separate quota for young applicants, setting higher qualifying standards compared to elderly applicants. Young people now comprise the largest group of applicants, despite their being made to wait longer than their older counterparts.

 

The number of non-elderly, single applicants soared from 36,700 in 2007 to 130,400 in 2014, according to the Housing Authority. The Housing Authority also noted that nearly 54 percent of young, single applicants in 2014 were under 30.

 

PolyU’s Chung said that many younger applicants would have lost their eligibility for public rental housing while waiting, once they crossed the income limits. However, the dramatic rise of young applicants reflects a certain sense of despair, as if they have given up hope of ever being able to afford a home of their own, no matter how hard they work.

 

Chung was told by his students at PolyU that given their faint hope for home ownership they saw no other choice but “to fill in an application form, for public rental housing and wait and see”.

 

“As housing prices continued to rise in recent years, and average salaries for fresh graduates did not keep pace, the prospect of young people ever being able to afford private housing has got bleaker by the year,” Chung said.

 

Home Ownership Scheme (HOS) for subsidized housing was scrapped in 2003, owing to a lull in the economy and caving in under pressure from homeowners that HOS was depressing property values. The government brought it back in 2011. The first of the new HOS flats is expected to be on sale by 2016. The price of a unit under HOS is roughly 30 percent below the regular market price.

 

Under the renewed HOS, only single applicants earning HK$20,000 or less per month are eligible. Their assets may not exceed HK$415,000. Similarly, applicants with two or more family members should not have a household income of over HK$40,000 and assets worth more than HK$830,000 to qualify.

 

In January this year the government conducted a lottery for allotting 2,160 HOS units, priced between HK$1.8 million and HK$3.8 million. Applicants who win the lucky draw could make a down payment of less than HK$200,000, while paying a mortgage at roughly HK$7,000 per month.

 

Roughly 135,000 Hong Kong residents, including 11,500 families who had been able to save enough for a down payment while living in public rental housing estates, had applied to buy an HOS unit. The government reported that 58 percent of the applicants were single individuals, many under 35, knowing they did not stand much of a chance, given families were given a priority. The relative youth of many applicants, however, reflected that they were anxious to settle down, professor Hui said.

 

“It is not that a lot of these young people have no place to live in. Some of them are university students, some fresh graduates and some have worked for a couple of years and are living with their parents. But a lot of them want to live independently or want to start early to catch up with the increasing property prices, because they know one day the property they own could become an asset that would help them accumulate and build their fortune,” said Hui.

 

A lot of these young applicants may become ineligible for a space in public rental housing estates while they wait. Their salaries, though not high, will most likely rise above the income ceiling, which is currently set at HK$10,100 a month.

“It is not that a lot of these young people have no place to live in. Some of them are university students, some fresh graduates and some have worked for a couple of years and are living with their parents. But a lot of them want to live independently or want to start early to catch up with the increasing property prices, because they know one day the property they own could become an asset that would help them accumulate and build their fortune.”

Eddie Hui Chi-man, professor, Department of Building and Real Estate, Hong Kong Polytechnic University