The World's Most Expensive Place to Live (For Now): Hong Kong's Jittery Housing Frenzy

Does a city where $1.5 million buys 500 square feet make any sense? Maybe shoebox homes in global capitals will just get smaller, but some think Hong Kong is heading for a crash.

800px-Hong_Kong_Skyline_Restitch_-_Dec_2007.jpg

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The International Monetary Fund has given Hong Kong bank shareholders a fright today by issuing a warning that the Chinese territory faces a real estate slowdown that poses risks for banks. After a long run-up in real estate values, a correction is upon us, the IMF stated in its report dated Nov. 17 but published today.

The IMF said the property sector represents half of outstanding loans for use in Hong Kong while real estate is often also used as loan collateral. A sharp property price correction would lead to an "adverse feedback loop between economic activity, bank lending, and the property market," the IMF explained.

Hong Kong is currently the world's most expensive place to buy a home. An apartment just sold there for $60 million. The city's property market is notoriously volatile. Booms and busts are frequent. Locals in the Chinese city often trade apartments as frequently as Americans would trade shares. Property managers sometimes put reports about local transactions and prices over the last quarter in residents' letterboxes, complete with candlestick graphs showing a dizzying number of sales and purchases. The territory experienced what felt like painful real estate downturns in 1997, in 2003 with the outbreak of SARS (pdf), and in 2008.

Another Hong Kong property bust? Source: Centa-City Index

But real estate crashes in Hong Kong do not tend to cause bank crises. Locals usually do not default on loans and post the keys back to the bank. That is because, on average, they are not highly leveraged. They tend to take the pain of negative equity stoically, either by doing nothing or working a second job. In 1997, when Hong Kong was mired in the Asian financial crisis and property prices plunged, taxi license applications soared and became a hot investment asset themselves (paywall). So a property bust is "mo fan" (麻煩 Cantonese for pain in the neck), but not scary.

The territory's citizens are big savers and buy their apartments with sizable deposits. HSBC, Hong Kong's largest mortgage lender and a bellwether for the Hong Kong banking sector, said in its last interim report that its average loan-to-value ratio on new mortgages was 50% . The loan to value ratio on its entire Hong Kong loan book, which will have been flattered by rising prices, is only 34%.

Back in September 1997, according to a survey released in 1998 by the Hong Kong Monetary Authority, the mortgage delinquency ratio was just 0.1%.  Back then, the average loan to value ratio on mortgages was 52%, which provided enough of a cushion to absorb real estate valuation falls.

A property crash could have big ramifications for Hong Kong retailers and, of course, construction companies. As London consultancy Capital Economics wrote in a note published last month, in the event of a real estate crash: " consumers would cut back on spending in response to a fall in their wealth."

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Naomi Rovnick is a Quartz correspondent based in Taiwan. She is a former senior business writer for the South China Morning Post and she won a 2011 Society of Publishers in Asia award for excellence in business writing.

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