GDP / Capita 500%, Home Price 300%

Stephen Chung

Executive Director

Zeppelin Real Estate Analysis Limited

November 2003 

From 1984, and based on nominal figures, Hong Kong¡¦s GDP / capita has risen 5 times while the price of a home has gone up only 3, having come down from a peak level of around 9. This is one reason that 30% or so projections of home price rises may not be entirely unreasonable, though admittedly there are many more factors that affect or reflect upon home prices other than GDP / capita, plus the fact that Hong Kong as a society has already passed its prime baby-boomers¡¦ household formation stage which occurred during the late 1980s and 1990s.

Naturally, most of our clients and friends are glad to hear of the possibility of such upward price movements (and residential prices have indeed adjusted upward a bit), yet they remain very cautious citing the still poor economy etc. Nonetheless, we are not saying that such price rises occur due to improvements in the economy. Instead, we are looking more from a ¡¥catching up¡¦ (with the GDP / capita) angle. As to why we think the GDP / capita has such a bearing on home prices, consider the following:

1)      GDP / capita has an overall high correlation with home price = versus other seemingly factors such as nominal interest rate, supply etc (which we found to have weak or little correlation to home price in the long run), GDP / capita demonstrated a significant relationship to home price, based on published information and data from government and professional sources.

2)      Form 1984 to 2002 = the correlation between GDP / capita and home price is around 0.8, which is quite significant.

3)      From 1984 to 1997 = the correlation is around 0.9, ditto total GDP, and during this period, even population seemed to have some mathematical relationship to home price.

4)      From 1997 onwards = only GDP / Capita still demonstrates a correlation of 0.8 to home price, GDP has gone down to 0.4, and the population factor even showed a reverse relationship.

Naturally, the fact that GDP / capita correlates to home price well does not automatically mean they have a cause and effect relationship, yet out of the various factors, GDP / capita seems to show a more consistent relationship. If so, then:

A)     From 1984 to now = Overall GDP has risen around 6 times, while GDP / capita is close to 5 times at 4.7 having dropped a bit since 1997. Home price had gone all the way up to 9 times in 1997 and since then has dropped to 3. [See chart below].

B)     Home price started to deviate from the GDP / capita curve around 1992 = From 1984 to 1991, both home price and GDP / capita increase in more or less the same rate, yet from 1992 and thereafter, their rates of growth (or contraction) differ, and at times significantly, though still in the same direction. For instance, in 1994, home price was up 6 times already yet GDP /capita had only 4. In 1997, home price was peaking at 9, yet GDP / capita was only 5. Now, home price is 3 while GDP / capita still hovers around 5 at 4.70.

C)    From 1998 to now = Home price was still around 6 times its 1984 level and dropped to a current 3, thus averaging around 14% per annum and being quite consistent at it.

D)    For home price to increase around 33% = Assuming the same (decline) rate of 14% is to be used for the increase, it would take a bit more than 2 years to reach the target of 4 from the current 3. Naturally, one may argue that the rate of growth (if any) may not be the same as the rate of decline, and we are not predicting that it would be so, just that such relatively symmetrical up and down had been observed in the 1996 to 1998 period.

To summarize, we do not know if the home price fluctuation will return to being more matching with GDP / capita (as in the 1984 to 1991 period), or it will stay less matched as in recent years, either way there is a chance for prices to catch up with the GDP level, in particular if confidence returns a bit and market sentiment improves (as to how these are drummed up is another topic). As for further decrease in home price, this is a possibility that will happen later if some of our internal economic structures including skills mismatch etc do not get addressed or resolved.

Please note GDP / capita is not a perfect measure, though it does in part reflect the earning power of an economy, which in turn affects the asset prices including real estate. Also note that while the GDP / capita has stayed the same, certain income structures and wealth distribution patterns might be changing in recent years. Further investigation is required.

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