However, unlike Hong Kong, Singapore has experienced an increase in residential property transaction volume in recent years.

This rise is due to the fact that 90% of those living in public housing in Singapore own their units. Together with an adequate housing supply, many Singaporeans have been able to “trade up” their properties. In contrast, there is an insufficient supply of private housing in Hong Kong. The government must boost supply to provide affordable housing to the public.

In his first Policy Address, which was delivered in January 2013, Hong Kong’s Chief Executive said the government’s policy objective for housing is to “assist the public in choosing accommodation according to their affordability and personal circumstances, and to encourage those who can afford it to buy their own homes”.

The question that then follows is, to what extent do property prices need to be adjusted in order to be affordable for the people of Hong Kong?

The price-to-income ratio (i.e. price of a 45sqm apartment/annual median household income 2) has generally stayed between 7 and 8 times in past years. The government may consider using this as the target of its housing policy.

Nevertheless, historically low mortgage rates, low housing supply, and increased interest from Mainland buyers have pushed up home prices. As a result, the ratio averaged 9.3 times from 2008 to 2012, and peaked at 11.8 times by the end of 2012.

But corrections are underway. On one hand, the Buyer’s Stamp Duty has kept Mainland buying fever under control since its implementation. On the other hand, US interest rates are expected to enter a rising trend in the coming years and housing supply is forecasted to rebound. With the unusual factors that have affected the market in the past few years out of the way, the price-to-income ratio for the housing market is likely to trend towards its long-term average, i.e. 8 times.

That means either wage growth has to speed up or prices will have to fall. People in Hong Kong should keep a close watch on the potential impact of the expected rise in interest rates and housing price corrections on their finances in the next few years.

Published on a quarterly basis, BEA’s Economic Analysis provides investors with an in-depth look into current market and economic issues. Copies of the report can be downloaded via BEA’s homepage: www.hkbea.com / Corporate Information / Economic Research.