Hong Kong Real Estate: What drives Hong Kong property prices

There have been debates on what drives property prices over the past a year and a half as Hong Kong property prices rose to a new record after the 1997 crash, but surprising the discussions have often led to wrong conclusions. Low interest rates, Chinese buyers, restricted supply, and weak dollar have been cited repeatedly as the causes of the big jump in Hong Kong property prices. Many also said there is supply and demand imbalances. Are they true?

Yes and No.

Hong Kong is indeed one of the most expensive cities to live in. According to Mercer’s Cost to Living survey 2010, Hong Kong comes as the third most expensive city in Asia, and 8th in the world, while Hong Kong Property Prices come as the third most expensive according to Global Property Guide. The sky high property prices have their origin more than decades ago.

Hong Kong is a small city with awful lot of people, but only a very small fraction of land are actually developed, because there are hills all over Hong Kong, which are not developable. Also, as the former British colony went through the transition of transfer of sovereignty, the Chinese and British governments agreed that the British Hong Kong government will only sell a maximum of 50 hectares a year since 1984 to 1997 (see clause 4). During the last leg of the boom of Hong Kong economy before 1997, with supply restricted by the Joint Declaration, Hong Kong property prices went through the roof until the burst of bubble.

The first Chief Executive of Hong Kong Mr. Tung Chee-hua thought that the government should increase supply to curb property prices. He proposed to supply 85,000 units of residential housing (private and public sector combined) per year to curb prices. The reality is the property bubble went bust even before any parts of such plan were implemented, and truth be told, the goal of 85,000 units was not implemented in full, as there was only one year in which the total new supply of housing reached anywhere close to that number (public and private sectors combined). Supply did, however, increase dramatically in private sector. After the burst of the property bubble, the private sector housing completion rose from 14,700 units from 1997 to above 20,000 units for six years since 1999, and reached 30,000+ in 1999 and 2002. It was not until 2003 when the government decided to leave the property market to their own device, that supply in the private sector dropped each year to the only about 7,000 units in 2010 (forecasted figure).

Housing Completion (Units per year) Source: HK Government

Could this great drop in supply cause the recent rise in property prices Let’s look at two other variables. The first is population growth.

Population growth Source: HK Government

The second variable is median household income.

Median Household Income Source: HK Government

Here are some chilling facts: the population growth of Hong Kong has been steadily declining, and it now barely grows, and the median household income today is exactly at where we were 10 years ago. The first fact begs the question of why Hong Kong need more apartments if population barely grows, all else being equal. The second fact begs the question of why property prices rise if income barely grows, all else being equal. In some ways, the first 10 years after the return of sovereignty to China was pretty much the lost decade of Hong Kong.

Now it is time to introduce the final set of charts.

Money Supply Growth and Property Prices changes Source: Centaline, Hong Kong Monetary Authority

The final set of charts makes it quite obvious that after 2003, a rapid rise of Hong Kong real estate prices almost always came after a rapid increase in money supply. In 2003-2004, the surge in M1 growth is very obvious, and so was 2009-2010. In 2007-2008, the M1 picture is less clear as I suspect that large IPO activities happening in Hong Kong around that period led to massive in-flow and out-flow in short period of time, distorting the picture. But the M2 picture looks very nice in that period. Similarly, in the only major correction of property prices in 2008 after Lehman Brothers went bust, we can see both M1 and M2 contracted before home prices declined.

When supply and demand are roughly balanced, it seems as though the Hong Kong real estate prices movements are largely monetary phenomena. At least after 2003, they were.

Photo by Mike Johnston

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.