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Real Estate Indicators in Hong Kong1

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Real Estate Indicators in Hong Kong1 FEATURE ARTICLE Real estate indicators in Hong Kong1 by Wensheng Peng and Kelvin Fan of the Research Department The sharp decline in property prices has had a significant impact on Hong Kong’s economy and the banking sector. Despite this, banking as a whole has remained in a healthy position. This article looks at available real estate indicators in Hong Kong that can be used for monitoring the vulnerabilities of the banking sector and the economy to fluctuations in property prices. Mainly two types of statistics are involved — property prices and banks’ exposure to property-related lending. The article also reviews the nexus between property prices, the macroeconomy and the banking sector in Hong Kong, drawing on studies carried out by the Research Department of the HKMA in recent years. The studies help shed light on the usefulness of the various indicators for monitoring the impact of property price changes. I. INTRODUCTION swings in the past two decades. In particular, prices of various types of premises have dropped by around International experience suggests that movements in 60% since the collapse of the bubble triggered by real estate prices have important implications for the Asian financial crisis. This has resulted in macroeconomic and financial stability. In Hong significant negative wealth and balance-sheet effects Kong, the relationship between the property market on private consumption and investment. The weak and the wider economy is of particular significance domestic demand explains why overall economic for a number of reasons. growth has been sluggish despite the strong performance of exports of goods and services in First, the property market plays an important role in recent years. The falls in property prices have also the Hong Kong economy. Housing is the most contributed to consumer price deflation via a direct important form of savings for many households. In channel through declines in rentals and an indirect the banking sector, currently about half of domestic channel through weak demand. credit comprises mortgage loans for the purchase of private residential properties and loans for property Thirdly, under the Currency Board arrangements, development and investment. Changes in property interest rates in Hong Kong are largely determined by prices and rents influence consumer price inflation, those in the US and the risk premium that is required and affect Hong Kong’s competitiveness as a by investors for holding Hong Kong dollar assets. service-based economy. Land sales and stamp Thus, monetary policy cannot be used to guard duties on property transactions have also been a against movements in asset prices and, more significant source of government revenue. generally, for macroeconomic stabilisation purposes. Regulatory policies are, therefore, of particular Secondly, property prices tend to be more volatile in importance in maintaining financial stability. Indeed, Hong Kong than elsewhere, with a number of large while the difficult macroeconomic environment, including the collapse of property prices, has affected banks’ profitability, the banking sector 1 This article was adopted from a paper prepared for the BIS/IMF Conference on Real Estate Indicators and Financial Stability, remains generally healthy. As is explained below, 27-28 October 2003. prudential measures by the regulatory authorities and 34 HONG KONG MONETARY AUTHORITY QUARTERLY BULLETIN MARCH 2004 FEATURE ARTICLE REAL ESTATE INDICATORS IN HONG KONG risk controls by banks have helped limit the exposure The R&VD publishes a comprehensive set of price, of the banking sector to the property market, and rental, and transaction statistics for various types of hence its vulnerability to fluctuations in property private residential and non-residential premises in its prices. Property Market Statistics on a monthly basis. There are two main types of price statistics: average prices This article provides an overview of the various real and price indices. The compilation methods of these estate indicators in Hong Kong that may be used in two types of statistics and their respective merits as monitoring the vulnerabilities of the macroeconomy an aggregate indicator of property price movements and in particular the banking sector to property price are discussed below. changes. Section II discusses two main types of real estate indicators: (1) property prices and Average prices (2) measures of the exposure of banks to the property sector. Section III reviews the nexus Average prices for various types of private properties between property prices, the macroeconomy and the (for residential, retail, office and factory uses) are banking sector in Hong Kong, drawing mainly on expressed in terms of price per square metre of floor analyses conducted by the Research Department of area. They are computed based on the actual the HKMA in recent years. These studies help shed transaction prices reviewed by the R&VD for stamp light on the usefulness of the various indicators for duty purposes. Transactions that involve a mix of monitoring the impact of property price changes. property types and properties that have not yet been The final section offers some concluding remarks. assessed for rateable values are excluded from the calculation. Residential properties sold subject to II. REAL ESTATE INDICATORS existing tenancies2, primary sales of residential properties,3 residential properties sold under Statistics about property prices and banks’ government-subsidised schemes,4 and transactions exposures to property lending are useful indicators involving government-owned quarters are also for monitoring the health of the banking sector. The excluded. Encouraged Set of Financial Soundness Indicators proposed by the IMF includes real estate prices, and Average prices are the most straightforward and the ratios of residential real estate loans and simplest indicators of the central tendency of commercial real estate loans to total loans (IMF, property prices of the entire population. However, 2003). These indicators can serve as early warning this method suffers from sampling problems in that signals of emerging asset quality problems, as the the sample of properties differs over time. In impact of property price shocks generally occurs with particular, average prices in a given month depend in a lag and the size of the impact depends on banks’ part on the special characteristics, such as quality exposure to the real estate market. This section and location, of the premises sold during the period, reviews the available indicators in Hong Kong. which may not be representative of the overall stock. Therefore, changes in average prices between two A. Property price indicators periods may be due to change in these characteristics and may not represent the price Property market statistics in Hong Kong are mainly change in the underlying population. compiled by the Rating and Valuation Department. 2 A residential property sold subject to existing tenancy refers to a 3 Real estate developers usually provide a variety of payment terms transaction that involves a transfer of ownership of the property for buyers to choose. The selling prices of these primary together with an existing rental contract of the property at the transactions may be affected by the differences in payment terms. same time from the seller to the buyer. As such, the transaction 4 Government-subsidised schemes include Private Sector price may be affected by the terms of the rental contract and Participation, Home Ownership, Buy or Rent Option, Mortgage may differ from that of other normal transactions. Subsidy, Sandwich Class Housing, Urban Improvement, Flat- for-Sale, and the Tenants Purchase Schemes. HONG KONG MONETARY AUTHORITY QUARTERLY BULLETIN MARCH 2004 35 FEATURE ARTICLE REAL ESTATE INDICATORS IN HONG KONG Price indices components in the current and previous 11 months, while those for non-residential premises are based The price indices are designed to measure changes on the proportions of the total floor area of the in prices with quality kept constant. They are derived components in respect of the current and previous based on the same set of transaction data for 11 months.7 The use of 12-month rolling transaction computing the average prices, but using a more data for determining the weights helps smooth out sophisticated statistical procedure. The compilation the volatility due to short-term fluctuations. of the indices involves the following steps. First, component indices for different classes of residential It should be noted that, like average price statistics, properties or different grades of non-residential the residential price indices do not include premises are derived.5 The indices measure price transactions of primary sales. However, transaction changes by reference to the factor of price divided prices in the secondary market should be able to by rateable value of the subject properties rather than reflect the market trend owing to a relatively high by reference to the price per square metre of floor liquidity in this segment. In recent years, the area as in the calculation of average prices. Rateable secondary market accounted for about two-thirds of value of a property is an annual rental value assessed the total transactions of residential premises by the R&VD as the basis for charging rates.6 In (Chart 1). Nevertheless, the indices may be affected assessing the rateable value of a property, reference by outliers when the number of transactions in a is made to open market
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