Surfing twin waves of credit from the US and China that have driven prices up by 60 percent in the last eight years, Hong Kong has become one of the world’s most unaffordable places to buy a home. Now UBS says that the city ranks second globally, behind only London, among housing markets most likely to have their bubble burst in the near future.
According to a report released on Thursday by the Swiss financial services giant, Hong Kong’s stagnant wages and rising supply of new homes, coupled with slowing growth in China, have put housing prices out of sync with the real economy.
The UBS Global Real Estate Bubble Index, predicts that the city’s home prices will drop 10 percent during 2016, and finds that Hong Kong’s market is more at risk than other famously frothy locations such as Vancouver, San Francisco or Singapore.
Hong Kongers Work One Year to Buy 3 SQM
Analysts at UBS pointed to Hong Kong’s record-high home price-to-income ratio, and high home price to rent ratio, as indicators that the city has a distinct risk of a housing bubble. According to the survey, which covered 15 cities globally, average home prices in Hong Kong are now 21 times average annual incomes – far exceeding the 14-to-1 ratio in London, which scored second on this scale. The study indicated that the annual income of even a highly skilled worker would be enough to purchase only 3 square metres of living space.
“House prices have decoupled most from local incomes in Hong Kong, London, Paris, Singapore, New York and Tokyo, where buying a 60-square-meter apartment exceeds the budget of most people who work even in the highly skilled service sector,” commented Matthias Holzhey, an economist at UBS’ Chief Investment Office for wealth management.
Hong Kong also was picked out as frothy due to its price to rent ratio of 33, which means that a tenant would have to rent a home for 33 years to match the cost of buying.
Property prices in the city are now 60 percent higher than they were in 2006, and nearly 200 percent higher than in 2003, when the market bottomed out after the Asian financial crisis. During the same period, rents have risen by only 35 percent, while incomes have remained flat in real terms.
Hong Kong Seen Facing Downdrafts
Aside from the historically high prices, the UBS survey pointed to growing risks for Hong Kong due to regional economic conditions.
With China’s GDP growth slowing to a reported 6.9 percent last quarter, the lowest level since 2009, the city may not be able to rely on the mainland for buoyancy.
The intention of the US Federal Reserve to raise interest rates, as well as a worsening job market in Hong Kong are also seen as pulling the housing market downward, at the same time that new housing construction is hitting the highest level in the past decade.
Last month investment bank CLSA also predicted an imminent downturn in the Hong Kong housing market, and estimated that prices would drop 17 percent in the next 27 months.
Sydney, Vancouver, SF and Amsterdam Also At Risk
Besides Hong Kong and London, the economists also identified the markets in Sydney, Vancouver, San Francisco and Amsterdam as being at risk due to deviations from the long-term home price norms for the cities.
Claudio Saputelli, Head of Global Real Estate for UBS’ Chief Investment Office, said, “A mix of optimistic expectations, favorable economic fundamentals and capital inflows from abroad has caused valuations to soar in certain cities in recent years. Loose monetary policy has prevented a normalization of housing markets and encouraged local bubble risks to grow.”
Valuations were also seen as stretched in Geneva, Zurich, Paris, Frankfurt and, to a lesser degree, Tokyo and Singapore.
Despite recent market recoveries, the US cities of New York and Boston were seen as fair-valued relative to their own history, while Chicago is undervalued.