Hong Kong Residential Prices: The Key is still NOT in Supply

Stephen Chung

Executive Director

Zeppelin Real Estate Analysis Limited

August 2003 

Recently the government seems to want to stabilize real estate prices, the private residential sector ones in particular. It also presents supply estimates in so many residential units over the next three years or so. Some welcome the policy focus while others remain skeptical of the supply projections. It is NOT the intention here to dwell on the pros and cons of such policies, or for that matter, the accuracy of the supply data. Rather, we would look into whether private residential supply does in fact have a significant influence on private residential prices, and if so, how high is such influence. The following reflects what have been found to date:

A)     Data and Information = these are abstracted mainly from published government sources including the web, and data dates generally from 1992 to 2001. Supply is based on the number of completions (of residential units) per year and it is assumed the majority of such units are to be sold.

B)     From 1992 to 2001 = the correlation between the supply of private residential units and their related prices seems weak, albeit in opposite directions if any, i.e. ones goes up and the other goes down. Perhaps other factors matter more.

C)    From 1992 to 1997 = the correlation is higher than the foregoing period from 1992 to 2001 yet is still weak if any, albeit in opposite directions. This differs somewhat from a common perception that (stringent) supply might have led to the price boom then, and perhaps one should take into account the demand side as well as without it, the quantity of supply may not mean much. Demand is driven generally by economic performance, demographics, education level, and other socio-cultural factors.

D)    From 1997 to 2001 = the correlation is still not high, though a bit higher than the foregoing. Looking at the supply data alone may not be sufficient.

E)     IF 1997 data is taken out of the picture = irrespective of whether it is the 1992 to 1996 period, or the 1998 to 2001 period, the correlations between the private residential supply and its price levels are highly insignificant. This may mean supply is definitely not the only or even crucial factor, although it may be argued that in an extremely hot market, a reduced supply fuels even more speculation and higher prices.

F)     (New) residential supply only fell below 20,000 per year in years 1996 and 1997 = in the preceding or succeeding several years, supply typically hovered around 25,000 to 36,000 units per year. As a matter of fact, the total supply from 1992 to 1995 very closely matches that for the 1998 to 2001 period, with both having 110,000 units. Nonetheless, the price trend edged upward from 1992 to 1995 while the opposite applies to the 1998 to 2001 period.

G)    Assume residential prices reflect Pre-Sale units = as presale is common in Hong Kong and implies the actual unit being delivered to the purchaser generally within the following 24 months, we have done a correlation based on such assumption that prices reflect the supply situation 2 years down the road. Nonetheless, the correlation between supply and prices remain insignificant.

Please note the above is quite roughly done and overall, supply has not been and does not seem to be a very significant factor affecting prices. Even a moratorium on building new supply may not help much. The key to prices is something else. 

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