Hong Kong’s housing is routinely reported to be the most unaffordable internationally. Demographia, the company that produces the annual reports on housing affordability, however, uses a very crude indicator for housing affordability; namely, the ratio of the median housing price to the median annual household income of the city.
The biggest problem with Demographia’s methodology is that it ignores that fact that the Hong Kong Special Administrative Region government probably ranks top in the world in terms of supplying affordable housing. In the first quarter of this year, 46.3 percent of Hong Kong households lived in low-cost public rental housing or subsidized Home Ownership Scheme (HOS) housing, while 53.7 percent lived in private housing (35.4 percent were homeowners, the remaining 18.3 percent were tenants). The median monthly income of households living in private housing was HK$42,000 ($5,377), which is 40 percent higher than the median household income, at HK$30,000 economywide.
In principle, housing affordability is a problem only for those who are not already living in public housing. So Demographia should at least use the HK$42,000 times 12 as annual income for the calculation of its housing-affordability indicator. That would push up Hong Kong’s affordability ranking a lot.
Another major problem with Demographia’s crude indicator is that it does not use after-tax household income in its formula. Hong Kong tax on incomes is probably the lowest in the world, with a top marginal tax rate of only 17 percent, as compared with the United States’ 37 percent and Singapore’s 24 percent. Moreover, Hong Kong does not have a goods-and-services tax nor a value-added tax. These sales taxes add to living costs in almost all of the other cities. Singapore charges a 9 percent goods-and-sales tax. The US’ sales tax varies from state to state and even from city to city within each state. The population-weighted average of the US’ sales tax is 7.52 percent. The European Union charges a consumption tax called a “value-added tax” that is applied to nearly all goods and services that are bought and sold for use or consumption in the EU, which generally ranges from 17 to 27 percent.
Still another major pitfall has to do with the onerous property taxes in many countries. In Hong Kong, the comparable property tax is rates and land rents charged by the Rating and Valuation Department. What is called “property tax” in Hong Kong is actually a tax on rental incomes that does not apply to homeowners. In California, there is a basic property tax charged at 1 percent of the appraised value of the property, including the dwelling, plus additional charges that vary by county. The median house price in San Francisco County is about $1.3 million, which is around HK$10.2 million. The property tax rate at 1.18 percent charged to the house price means that the yearly property tax is $15,340. This averages out to about HK$10,000 per month. This is much more than the rates and land rent charged in Hong Kong, which is more like HK$6,000 to HK$7,000 per quarter. The onerous property tax in the US is clearly an affordability issue. If the extra tax cost is “capitalized” to “present value” and added to the housing price, America’s housing prices will have to be raised by at least 15 to 20 percent, depending on the interest rate used as the discount rate.
The fact that Hong Kong is a safe, cosmopolitan city with a beautiful harbor, fantastic infrastructure and many amenities, which has easy access to beautiful country parks and entertainment, as well as to good food in Shenzhen and other Guangdong-Hong Kong-Macao Greater Bay Area cities, means the “price premium” on its housing is well deserved
Still another reason why Hong Kong’s housing prices appear to be high is that mortgage rates are quite low. Mortgage rates have ranged from 1 to 4 percent since 2009. These are variable rates. America’s 30-year fixed-mortgage rate on Aug 19 was around 6.64 percent, while the mortgage rate based on the Hong Kong Interbank Offered Rate was 3.31 percent. America also offers adjustable-rate mortgage (ARM). The ARM 10y/6m rate quoted by Bank of America was 6.25 percent to 6.755 percent. “6m” means that adjustment is made every six months. The lowest such rate, 5 yr/6m, was quoted at 5.875 percent.
So there are indeed multiple reasons why Hong Kong’s housing prices appear to be higher than the norm among major cities. But once we understand Hong Kong’s tax system, lower mortgage rates and huge public housing program, the higher housing prices do not mean that they are less affordable.
Apart from these considerations, the fact that Hong Kong is a safe, cosmopolitan city with a beautiful harbor, fantastic infrastructure and many amenities, which has easy access to beautiful country parks and entertainment, as well as to good food in Shenzhen and other Guangdong-Hong Kong-Macao Greater Bay Area cities, means the “price premium” on its housing is well deserved.
The SAR government has gone to great lengths in making life easier for those with low incomes so they can enjoy healthy living conditions. For those who live in crowded conditions in subdivided flats, the government has introduced “community living rooms” so they can use the convenient public facilities for daily household needs and socializing.
It is my fervent hope that the government will also consider the needs of the middle class. In principle, those seeking to satisfy their housing needs through their own effort should enjoy better housing compared to those living in subsidized public housing. We must avoid distorting incentives so that “lying flat” turns out to be a better deal than trying to be self-reliant.
The author is an honorary research fellow at the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University, and an adjunct professor at the Academy for Applied Policy Studies and Education Futures, the Education University of Hong Kong.
The views do not necessarily reflect those of China Daily.
