Hong Kong homes offering more affordable rates

Compared with China's first-tier cities.

It has been noted that homes in HK are becoming “relatively more affordable” versus first-tier cities in China.

According to a research note from Bank of America Merrill Lynch, HK's housing affordability ratio, defined as monthly mortgage payment as a percentage of median private household income, now stands at 58%, according to Bank of America Merrill Lynch's analysis (assuming flat size of 700 psf, 70% LTV and 25 years of mortgage tenor).

In reality, this ratio should be slightly lower as HKMA has tightened mortgage limits for flats valued below HK$7mn from a maximum LTV of 70% to 60% starting March 2015. Thus, the down-payment requirement has become more of a determining factor in whether home prices are affordable.

However, for simplicity's sake, Bank of America Merrill Lynch continues to assume a 70% LTV in calculating their affordability ratio time series. Home price to income ratio, which is another important metric to gauge housing affordability, was at 16.8x in 3Q16.

Here's more from Bank of America Merrill Lynch:

With the exception of Guangzhou, we estimate that the housing affordability ratio now stands at 80-124% for the other three first-tier cities in China after 24-38% surge in home prices YTD (assuming flat size of 90 sqm, 70% LTV and 25 years of mortgage tenor).

Their home price to income ratios were at 14.6-22.5x as of Aug 2016. Now that the home price gap between Hong Kong and the first-tier cities in China has narrowed and that the affordability of the latter has become more stretched, we believe more mainland investors might consider buying a second home in Hong Kong for diversification or wealth-protection purpose.

Meanwhile, some mainland investors could have sold some of their properties in China to lock in profit, and decide to re-deploy their proceeds in Hong Kong.