Home prices are always a concern for the public, and the property prices' surge in recent months has attracted the government's attention with the market expecting new government measures to help cool down the market.

The Centa-City Leading Index (CCL), which tracks the city's used home prices, has climbed for four consecutive weeks to a record high of 107.18 on August 24, overshooting the previous peak recorded in 1997 by 7.18 percentage points. The index has surged 13 percent from its recent low in March.

Meanwhile, the CCL Mass index, which tracks the mass market's home prices, has increased 3.16 percent over the past four weeks, versus the 2.14 percent rise in the CCL index, suggesting that the demand is mainly from first-home buyers and upgraders.

The property price is determined by demand and supply. In the short run, the supply is relatively inelastic and it is very difficult to increase the private housing supply. On the demand side, it is different as some new demand has emerged in the past decade. First, more and more foreign capital has flowed into the property market. Some of them are investment funds, which invest money into commercial buildings, shopping malls and even residential properties. The funds can either be private or public, while some are even listed in the stock exchanges in the form of REITs (Real Estate Investment Trusts). Second, more and more mainland citizens want to buy accommodation in Hong Kong. This may due to several reasons; the Hong Kong apartment can serve as a second home, holiday house or even investment. This is more prominent in prestige areas, such as western Kowloon, the peak and the northern part of Hong Kong Island. To a certain extent, the newly developed private estates or famous private housing estates can be the investment target for these wealthy investors.

Third, the development of Hong Kong tertiary education makes the city as one of the major education hubs in Asia. Because of the China factor, most of the oversea students will choose the exchange destination in Chinese cities in order to gain the so-called "China experience". Hong Kong is definitely one of the common choices. As more students study in Hong Kong, it creates demand for housing. However, due to the lack of land, universities can only provide limited hostels for them. Besides, every year universities in Hong Kong are allowed to admit only between 10 to 15 percent non-Hong Kong residents, including the post-graduate students (most of them non-local students), thereby boosting the demand for hostels. As most universities cannot handle such a huge demand, they usually ask the non-local students to find their own accommodations. Therefore, non-local students join together and rent private apartments in near-by areas pushing up the rental income for private housing. Since the private property yield is increasing based on these factors, it has given strong support to property prices. .

The author is associate professor at Department of Finance & Decision Sciences of Hong Kong Baptist University. The views expressed here are entirely his own.

(HK Edition 08/31/2012 page2)