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We would like to thank Nigel Chalk, Steven Barnett and Papa N’Diaye, as well as seminar participants at the Hong Kong Monetary Authority for helpful comments. Discussion with Nigel Chalk substantially improved the paper.
Hong Kong SAR’s price and rent data date back to 1982, and relevant measures such as price-to-rent and those of house price appreciation rates rely on relatively long time series. Vacancy rates, however, are available from 1999 at annual frequency.
We should be cautious when comparing prices or rents across cities, particularly because they are not controlled for quality changes. The fundamental-implied price is calculated from rent-to-user cost ratio of a housing unit in a given locality where rental market is well functioned and quality of a rental unit should change at a similar rate as that of an owned unit.
Other studies cited earlier tend to proxy expected house price growth with some form of constant average historical rates.
We learn from talks with market specialists that the majority of Chinese overwhelmingly prefer owning to renting. This should translate into lower risk premium in China than elsewhere. Data show this to be the case as well.
New mortgages approved with reference to the best lending rate decline from 41 percent of total new mortgages in 2009Q4 to 17 percent in 2010Q2 while those referenced to HIBOR increase from 57 percent to 83 percent during the same period. The best lending rate is higher than the HIBOR.
The upper bound is calculated based on HSBC’s best lending rate (5 years) and the lower bound is based on the 12-month interbank offered rate (HIBOR). Because mortgage interest payment is tax deductible, a percentage point decline in the mortgage rate (for a given level of risk-free rate) would raise the user cost by τ. So if the prevailing mortgage rate referenced to HIBOR is used in the calculation instead of the higher best lending rate, the benchmark price would be lower, implying larger over-valuation (or less under-valuation) than the case based on the best lending rate.
Singapore’s housing price (here, private apartments) currently appears to show sign of an incipient stage of mispricing in 2010H1, based on our indicator.
The AR coefficient ranges from 0.7 for Class E progressively up to 0.83 for Class A.
Forecast for 2010–11 shows tight supply of residential flats for Hong Kong and Kowloon areas and expansion in New Territories compared to 2008-9 (indeed, back to high levels seen in 2006–07). See completion and forecast data from Tables 5–7 in Hong Kong Property Review 2010, Rating and Valuation Department, the Government of Hong Kong SAR.