Rationale for the study
Both property and housing markets are essential for economic growth in Hong Kong. Similarly, the price of land is high in Hong Kong because it is scarce and decreases in terms of availability. By limiting its supply, the value of real estates will be kept at high levels. During these periods, property owners will make high returns on housing investments due to the increase in the number of speculative transactions.
Objectives
The main aim of this paper is to examine the driving forces that are behind the development of housing market in Hong Kong. Secondly, to provide an explanation regarding the effects of interest rates, land supply, and SDD policy on housing properties in Hong Kong. And lastly, to focus on the effectiveness of the SSD and whether the housing prices will provide a better alternative to SSD in preventing speculation.
Methodology
The important information like search data is obtained and analyzed in this research paper to assess possible concerns that are affecting housing prices in Hong Kong.
In this research paper, secondary data are the only available data for the analysis. Since this is a published data collected for the purpose of analyzing different but specific research, there will be some variance while analyzing the results.
Effects of SSD policy on housing price in Hong Kong
As a result, of the introduction of the special stamp duty on housing facilities especially at the point of resale has made several real estate agencies in Hong Kong to state that the transaction of second-hand residential houses has led to the drop in housing prices in a significantly. Similarly, the cumulative houses declined by more than 60% (Ird.gov.hk, (2016). Consequently, this led to an anticipation that a good number of small and medium sized housing agents to close down in Hong Kong. However, the government has been watching the development of properties in the private residential market at a closely and it has remained vigilant on the risks concerning the housing bubbles.
The policy of SSD has forced the government to intervene in the situation by introducing the long, medium, and short-term solutions such as increasing the supply of land, preventing some speculative housing activities, promoting transparency in housing transactions, and prevention of excess mortgage lending expansion in Hong Kong. All are aimed at ensuring that there is a stable development of property markets. Therefore, measures of SSD package has combated the speculation of short term housing prices including the residential properties. Moreover, the effects of SSD on housing prices in Hong Kong has restricted the short-term pricing strategies. Thereby a drop of over 70% of house prices was experienced in 2011 as compared to the monthly average before the SSD policy.
Effects of increase in interest rate on housing price in Hong Kong
The increase in interest rates has slowed down the dramatic rise in housing price in Hong Kong. Therefore, the price of private residential properties declined towards the end of the year, 2008 and since then, it has been a tear. Similarly, as from May 2009, the property prices in Hong Kong increased by over 180% in spite of many demands concerning management measures that were launched by the government (Global Property Guide, 2016). However, the main cause of escalating housing price in Hong Kong is the low-interest rate of which cannot change unless the Federal Government initiates some lift off.
There are two major reasons that explain why increasing interest rates will cause weaker momentum for housing prices.
Affordability
A typical apartment house in Hong Kong costs more than ten times the median of the yearly income of households. By analyzing this metric, several prospective house owners could have been priced out of the market.
According to the HKMA, the gearing ratio of income is approaching 70 %, and this ratio is considered to be higher than the long-term average of 50% in 2008. The payment of mortgages is very sensitive to the increasing interest rates (Craig & Hua, 2011). Therefore, appropriate monetary policies will house to be less affordable. Consequently, this will put down some pressure on the house prices.
Attraction of interest rates
When interest rate rises, the rental yields will be less attractive. For instance, during the first quarter of 2015, the properties that belong to class "C" dropped to 2.6%. Therefore, as interest rate increases, the rent yield will be more advantageous due to rising rents, price drop; thereby rents out spaced the price for houses (Zhou, 2015).
The housing price will bear the burden of adjustments due to the spectacular increase in prices and rents as interest rate increases. According to the viewpoint of valuation, the housing price indicates the value of rental income in future. Therefore, when interest rates are high, the receipt of future rents will be unfavorable, and the properties will command a low value. Similarly, the rise in interest rates will lead to an increase in the rate of discounts, and this will exert downward pressure on housing price.
Effects of land supply on housing price in Hong Kong
The government of Hong Kong has full control over the supply of land, and this is important to the housing sector since there will be a provision of low-cost houses to members of the public (Peng & Wheaton, 1993). This made Hong Kong to be the second largest in the public housing sector in the capitalist world after Singapore with half of the total housing stock. For example, if the government of Hong Kong restricts the expansion of future land supply and maintains the flexibility in building their destiny, then there will land shortage thus increasing housing prices. However, there will be no shortage in supplying housing units.
If the government reduce the land supply, the demand for investing in various housing units in Hong Kong will increase because the market speculators will be able to determine that there will be less land in future (Peng & Wheaton, 2004). On the other hand, when there is an expansion of land sale by the government in Hong Kong, the price of the land will decrease because the land will be scarce and this will diminish the demand for investing in the housing sector.
Timeframe
Every task in the research paper will last for about a month, and since this time frame is limited, regression method will be applied to data analysis.
References
Craig, S., & Hua, C. (2011). Determinants of Property Prices in Hong Kong SAR: Implications for Policy. International Monetary Fund.
Global Property Guide, (2016). Hong Kong property prices surging again!. Retrieved 23 February 2016, from http://www.globalpropertyguide.com/Asia/hong-kong/Price-History
Ird.gov.hk, (2016). PRESS RELEASE. Retrieved 23 February 2016, from http://www.ird.gov.hk/eng/ppr/archives/14121701.htm
Peng, R., & Wheaton, W. (1993). Effects of restrictive land supply on housing in Hong Kong: an econometric analysis. Joint Center for Housing Studies, Harvard University.
Peng, R., & Wheaton, W. (2004). Effects of Restrictive Land Supply on Housing in Hong Kong. Econometric Analysis, 5(2).
Zhou, T. (2015). Economic Review. Hong Kong Has Nothing To Fear About Increasing Interest Rates.
