Hong Kong is emerging from two rough years, with 2019 turning out to be one of its most traumatic periods because of the civil unrest, while 2020 and 2021 have not been any easier either because of the ongoing COVID-19 pandemic.
Despite the last two challenging years, Hong Kong is as strong as ever. We can take assurance from the fact that, according to revised government figures released on Aug 13, Hong Kong’s economy is expected to grow by between 5.5 percent and 6.5 percent this year, compared with an earlier range of 3.5 percent to 5.5 percent, which means that the growth is considerably higher than initially expected.
In other words, Hong Kong will leave behind this period of uncertainty soon and will become as strong as ever, or even more so. However, if there is one constant problem or concern in Hong Kong, one that never seems to fade away, that is a housing shortage and skyrocketing home prices.
Last month, home prices jumped to a record high according to the home price index compiled by Centaline Property Agency. The previous record for the price index was set in mid-2019 at the beginning of the civil unrest. Residential property values have increased 8.6 percent since the beginning of 2021.
The opposing sectors would have to compromise by adopting land reclamation, using the fringes of country parks, converting industrial land and buildings for residential use, even requesting the central government to apportion land near the border for our use
One might wonder: How is it possible that home prices keep going up despite the pandemic? Should it not be the opposite?
The truth is that real estate and housing in Hong Kong are areas difficult to analyze because of Hong Kong’s peculiar system of landholding and also because of its lack of usable land, among other things.
In addition to the strong demand from local buyers, Chinese mainland investors are helping boost the prices. They made up 11.2 percent of purchases by value in the first four months of 2021, up from 10.5 percent in the same period last year, according to Midland Realty. Prices are expected to keep rising: Cushman and Wakefield expects home values to climb another 5 percent by the end of the year.
In my opinion, there is a potential property bubble considering not only the threefold increase in prices in the period 2003-18, but also the recent increases notwithstanding the pandemic. The UBS Global Real Estate Bubble Index Report 2017, for example, stated that Hong Kong might be facing another financial bubble as current housing prices are seen as “fundamentally unjustified”, and that benchmark metrics such as the previously quoted price-to-income and price-to-rent ratios have reached all-time highs.
For me, there are three main factors that foretell a property bubble: the lack of building land, government policies, and the constant globalization of financial markets. I will focus now only on the first one.
As to the lack of building land, there is a big mismatch between the demands and the supply of land. Hong Kong has more than 7.4 million residents crammed into a relatively small land mass. This land mass, per se, is not so small, since Hong Kong has a total land area of 1,104 square kilometers. The problem here resides in the fact that almost 40 percent of the total land has been designated as country parks and special areas, which prohibits any construction. Consequently, construction is permitted only on 60 percent of Hong Kong’s land area, which has clearly proved to be insufficient.
This issue could be solved in several ways, but none of them seems to please everyone. It is critical for the long-term well-being of Hong Kong that proper solutions are found to make land available for housing, thus making everybody’s lives easier. The government should find a way to stop land hoarding by the developers, a way to reclaim more land, and a way to reduce the size of country parks.
Will this bubble burst any time soon, though? My answer is no. Hong Kong’s property bubble will not burst unless it is triggered by some unforeseen disaster. Even if property prices are extremely high, there is liquidity in Hong Kong. Liquidity is the main safety valve obviating a property bubble burst either in Hong Kong or on the Chinese mainland. Moreover, the bubble will not burst because developers will keep on raising prices while finding ways to tempt people to buy. In this case, what goes up may not necessarily come down.
However, this does not change the fact that such an increase amid a pandemic is extremely concerning. Overcoming Hong Kong’s housing problems will require a multipronged approach because the community has not been able to reach a consensus. The opposing sectors would have to compromise by adopting land reclamation, using the fringes of country parks, converting industrial land and buildings for residential use, even requesting the central government to apportion land near the border for our use.
The author is a fintech adviser, a researcher and a former business analyst for a Hong Kong publicly listed company.
The views do not necessarily reflect those of China Daily.