Although supply-shortage is often being cited as the cause of high home prices in Hong Kong, I have repeatedly point out that the true cause of rising property prices is monetary expansion due to in flow of capital and currency peg. I have also pointed out earlier that increasing annual supply of residential units will not help because one have to take the total housing stock into account.
The following analysis tries to establish the true supply situation in the private residential real estate market and to estimate the possible over or under-supply in the private residential property market, taking the total housing stock into account instead of the annual supply. Then I will derive the required new housing supply level in the private sector that would keep the supply-demand balance unchanged from where it currently stands.
Too Many Or Too Few Flats?
Based on different sources, the following table shows the estimates of total housing stock in 2010:
Sources: Yearbook 2009, Housing Authority, etc. (See Note 1)
We can obtain the rough proportion of households living in different housing categories from the 2006 by-census data. The proportion is quite stable and tend only to change slowly, so I will assume the proportion to be constant for the time being. At the end of 2010, the population of Hong Kong was 7,097,600, and the number of households was 2,339,700. Using the number of households number and the proportion of households living in different housing categories, we can estimate the actual demand of residential units in various housing categories, assuming each household use one unit.
Sources: Yearbook 2009, Housing Authority, Census and Statistics Department
An alternative method is to use the number of landed domestic households and the proportion of these households living in each category (Housing Authority data).
Sources: Yearbook 2009, Housing Authority
These estimates are not perfect, but it is better to be vaguely right than exactly wrong. As far as the private sector is concerned, it is fair to say that the total stock is roughly 210,000 more than really needed, assuming that each household only use one residential unit. The surplus residential units represent roughly 15% of the total private sector housing stock. Of course, there are always some vacancies in any property market no matter how tight it is, and there are bound to be some families occupying more than one unit. On the whole, however, there is hardly any shortage of residential units in the private sector. (See Note 2).
How Many Annual Supply Are Really Needed?
The next step is to estimate the required net supply level that would keep the surplus-to-total-private-sector-housing-stock ratio roughly constant. I take the population projection by United Nations Population Division, and assume that the average household size to be constant at 2.9 (as it currently is) to estimate the annual increase of the number of households. Assuming that 49.8% of these new households will go into the the private market (see the second table), the annual new demand from this year till 2050 is as follow:
Source: United Nations Population Division
To keep the surplus-to-total-private-sector-housing-stock ratio constant, the absolute number of surplus will rise, of course.
The following chart shows the surplus level under different net new supply scenarios relatively to the required level (in dotted line) in the next 5 years:
Under these set of assumptions, an annual net supply of a little more than 10,000 units (to be precise, about 13,000 a year for the next 5 years) will be required in keeping the slack in the housing market constant in the next five years. Here I should stress that the required supply level is a net figure, as we should also take any demolition of aged buildings into account.
The government has pledged to increase supply in various occasions. For instance, Donald Tsang, the Chief Executive, pledged to supply 20,000 units a year, and John Tsang, the Financial Secretary, thought that the new supply in the coming year will reach 30,000 to 40,000 units (which was subsequently challenged by others as unachievable). The bottom-line is this: if 20,000 units are completed each year in the coming 5 years, there would be a supply overhang unless 7,000 units were demolished each year somewhere else. And if new gross supply reached 40,000 units a year, there would be a supply overhang unless almost 30,000 units were demolished elsewhere (See Note 3).
What Can Go Wrong?
To briefly summarise, the above derivations show that:
1. If there are some 210,000 flats in excess of real demand, there is no supply-shortage in private residential real estate market to speak of.
2. To maintain the current level of supply-demand balance, 13,000 units of net new supply of private sector residential real estate units is the right number, and that number will only decrease in the long run.
Now what can go wrong? Many things can go wrong, but the impact will vary. For example:
1. The population growth projection may be wrong, but it is going to be slower in the years to come no matter what, so the demand in the long run can only go down, not up.
2. If the average family size gets smaller for new households (from 2.9 to 2.5, for example), the optimal level of net new supply will increase (from 13,000 to 15,000).
3. The change in preference over various housing categories will have big impact. If, for example, 100% of new households went into the private market (which is unrealistic), the optimal net supply will be 26,000 for the next five years to maintain the same level of surplus-to-total-stock ratio. And if significant proportion of people are upgrading from whichever housing categories to private residential housing, the optimal net new supply will likely increase.
Change in family size and housing preference, however, only happen slowly over time, that means the current estimates should still be the good guide for the demand situation in the coming five years, so the actual required supply level should not be much off from the 13,000 units per year estimate. And note also that the required net new supply is meant to keep the level of surplus level unchanged. With 210,000 units around which are surplus to requirement, there should be enough slack to meet the real demand even if the net new supply drop below the required level for a few years. That can only mean one thing: Supply-Shortage Hypothesis is really nonsense.
Note 1: Differences in the definitions of private housing in different government agencies can produce wildly different estimates of total housing stock in the private sector. The Rating and Valuation Department’s estimated that the private sector housing stock was 1.1 million only in 2009, which was actually less than the number of households living in private residential housing in 2006. Thus 1.4 million of total private housing stock is a more reasonable number (at least they can really house 1.2 million families).
Note 2: Ideally, It would be great if we can construct a whole time series of how the surplus units as a proportion of total supply varies over years so that we can have a sense of what is a “natural” level of surplus. Unfortunately this is almost impossible to construct due to inconsistency of data over a long period of times, probably because there have been changes in how the data are computed.
Note 3: To give you a perspective, to demolish 30,000 residential units is roughly equivalent to demolishing the whole of Tai Koo Shing, the whole of Mei Foo San Chuen, and the whole of Luk Yeung Sun Chuen.
P.S. I hope someone can tell me if there is some statistics on how many residential units are being demolished each year…
This article originally appeared here: Hong Kong Property: The Real Supply Situation
Also sprach Analyst – World & China Economy, Global Finance, Real Estate
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