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The Overheating Housing Market of Hong Kong

Hong Kong, despite being a territory of China,  enjoys a high level of autonomy since its handover from the UK in 1997. HK’s independent government possesses different policies from that of China and thus it faces very unique challenges, and the ongoing real estate bubble is certainly a major one.

According to Savills, Hong Kong is the world’s most expensive city to buy a home, being 55% more expensive than London. It is also the most expensive city for luxury real estate, averaging $10,880 per square foot. In addition, it boasts the most expensive office market in the world, with the Central District having an overall occupancy costs of $246 per square foot. This massive real estate bubble needs to be addressed immediately, as it is harming HK’s reputation as a convenient international business hub. More importantly, it is affecting the life quality of its local residents;  as researched by JPMorgan,

A 1,300 sq ft apartment in the Belcher’s (upscale private complex in Hong Kong’s Western district) is equivalent to 11.6 times an income of HK$100,000 per month. Even wealthy households cannot pay for property from income.

which is why the government is finally working to attack the problem, and we are here to discuss the problem from a network science perspective.

To begin, we can analyze the Hong Kong housing market in a simplistic way: a two-sided many-to-many matching model with consumers and real estate developers, with consumers having incomplete preferences over real estate developers (or the developments) and vice versa. Note that although we can model the housing market with a matching model, it is important to realize that no matching model can completely reflect any real estate market accurately in the real world. For example, the free nature of the market implies that it is not strategy-proof (hence the existence of real estate agents),  while the nature of the relationship among real estate developers and consumers implies information asymmetry, although the government is striving for a more transparent housing market with stricter policies and laws.

One main cause of the housing bubble, according to HK locals, is that richer-than-ever mainland Chinese are entering the housing market with stronger-than-ever Renminbi, causing a massive increase in price in the HK market, which primarily uses the weak HK Dollar. From here, we can see that the agents are split into two uneven groups: HK locals and Mainland Chinese investors. To address this, people have suggested creating more public housing for the middle and lower class, or allocating new land to accommodate the need of the luxurious Chinese housing market and to separate the two groups in order to reduce direct competition. However, even if any of those solutions is approved, the process of developing such land is going to take years to complete, and it’s not going to have an effect on the market immediately.

In addition, government has also suggested creating housing quota for foreign and mainland Chinese buyers, or imposing tax on them (which is what Singapore does), similar to how the housing market can change agents’ preference over different houses. However, would this be fair for the mainland Chinese buyers? Furthermore, what would be a “fair” matching for the model? On one hand, Hong Kong is part of China, and it is supposedly the “freest economy in the world” so such policies could potentially harm HK’s reputation, on the other hand, HK locals are suffering and a solution is desperately needed. The HK government would have to work hard for the answer and the perfect balance, but it is not going to be easy given the political tension of the city.

Lastly, the HK government is encouraging more real estate developers, particularly those from mainland China, to enter the market. This is going to be beneficial, as more competition among developers can definitely lower housing price and even increase housing quality. For many years, the developer side of the matching model has only consisted of a few major players due to HK’s small size, as shown by the fact that most HK billionaires on the Forbes 100 list have a background in real estate, and hopefully this is going to change in the future.

The power of network science is not that it can utilize powerful mathematical models and theories. Instead, its power lies in the fact that it can be used to address real world problems (although sometimes with flaws). One can only hope that the government not just in Hong Kong, but around the world, can use more scientific approaches to analyze social problems.

Sources:

http://www.forbes.com/sites/kenrapoza/2013/03/29/if-hong-kong-isnt-a-housing-bubble-then-nothing-is/

http://www.telegraph.co.uk/finance/personalfinance/expat-money/9932582/Hong-Kong-the-worlds-most-expensive-city-to-set-up-shop.html

http://www.ibtimes.com/hong-kong-remains-worlds-most-expensive-city-billionaire-homes-1141465

http://www.property-report.com/hong-kong-property-owners-will-not-face-luxury-housing-tax-28335

http://www.forbes.com/billionaires/list/

– jw582

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