Factors that fuel housing and shop rent increase in HK

Updated: 2012-10-11 07:09

By Wan Dik (HK Edition)

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Hong Kong's real estate market has been rising in the last few years, as the flow of capital and personnel grew after the 2008 global financial crisis. Property prices have been going up for almost four years with most of the categories gaining 30 percent to 50 percent on average and some locations as much as 70 percent.

Meanwhile rents have been soaring as well, not just for residential units but business spaces, too. The simultaneous rise of housing prices and rents has been so dramatic it is now a bona fide social problem.

In response to the persistent overheating of the property market, the Hong Kong Monetary Authority took steps in mid-September to tighten control over mortgage loans, especially those for purchasing second pieces of property as investments, but has not done anything to rein in runaway rents.

In the monthly release of government statistics, the margin of rent increase has not become the main driving force behind rising consumer price index (CPI) just yet, but is no doubt one of the significant contributing factors already.

The US Federal Reserve Board recently said the low-interest situation will continue until 2015 with little hope of interest hikes in the next two to three years. Currently, interest on mortgage loans offered by banks in Hong Kong remains rather low, while returns on rent are generally higher than savings deposits, which is why many people are inclined to buy housing units to collect rents, instead of selling them.

Compared with residential units, shops have seen even bigger rises in rents in recent years. In core business districts, shop rents have redoubled in the past two or three years from around HK$400-500 to HK$2,000-3,000 per square foot and they are still rising.

Some analysts have suggested the surge in rents may have been a result of a significant increase in the number of visitors from the mainland since the Individual Travel Scheme (ITS) was introduced in 2003, which has proved a huge boost to tourism-related sectors and the economy as a whole. As the ITS has entered the 10th year of implementation, fast-growing spending by mainland visitors in Hong Kong has no doubt become a major driving force behind the SAR's economic development. Businesses catering to mainland residents visiting Hong Kong under the ITS are practically guaranteed profits and therefore willing to pay higher rents to stay in busy shopping districts.

Some mainland visitors are very wealthy and come here specifically to buy luxury consumer items, because they cost much more on the mainland due to high tariffs. The purchasing power of these wealthy tourists has attracted not only local retailers, but also foreign brand-name suppliers as well, resulting in a dramatic increase of demand for store space in prime locations and skyrocketing rents. The influx of free-spending mainland tourists has arguably prompted property owners to raise shop rents in large residential estates, too, according to some market watchers. As a result, even kindergartens are charging more for enrolment these days, because the operational cost of pre-school education has increased significantly, thanks to soaring rents and higher prices of other necessities.

Residential apartments cost so much to rent nowadays, many locals cannot afford them, let alone poor "new immigrants" who have to make do with the "sub-divided rooms" - tiny cubicles separated by plywood boards within apartments, to house more families who cannot rent a whole flat each on their own. Such "unauthorized building works" are fire hazards and rife with neighborly squabbles, adding to housing-related social discontent that will continue as long as this kind of disparity exists.

The new SAR government has made it a top priority to cool down the overheating property market, and recently announced a series of short- and medium-term measures aimed at increasing public and subsidized housing flats as well as land for affordable housing development. The drawback is that these measures are all meant to bring prices rather than rents down, which means it will take much longer for them to affect rents, if ever they do.

There are other contributing factors behind the persistent rise of home and shop rents as well. Generally speaking, as long as the strong inflow of capital and personnel continues, the annoying situation of super-high property prices and rents will very likely remain.

The author is a current affairs commentator.

(HK Edition 10/11/2012 page3)