Hong Kong and Sydney have been rated as the world’s most unaffordable cities in which to buy a home, in stark contrast to the relatively economical Tokyo and Singapore. Yet despite fears of a bubble in Asia’s most expensive cities, governments have shown a mixed response and may be worsening the problem, analysts claim.
In its latest annual survey, U.S. consultancy Demographia rated Hong Kong as the least affordable city among 406 metropolitan housing markets worldwide. In Hong Kong, median income households need to save for more than 18 years to buy a median home costing HK$5.4 million ($695,000).
Residents of Sydney, Australia’s biggest city, need to save more than 12 years of household income to buy the average A$1 million ($766,000) house, compared to the 11.8 years required in third-ranked Vancouver.
Numerous other Australian cities also picked up the unwanted tag of being severely unaffordable, including Melbourne (9.5 times), Adelaide (6.6 times), Brisbane (6.2 times) and Perth (6.1 times).
Across the Tasman, New Zealand’s major financial center, Auckland ranked as the fourth most unaffordable major housing market, with house prices standing at 10 times average income.
In contrast, Singapore was rated as relatively affordable, with the median multiple of price to income at 4.8 times, marginally higher than the 4.7 multiple of Japan’s Tokyo-Yokohama metropolis. Japan’s Kansai region of Osaka-Kobe-Kyoto region was even more affordable, requiring 3.4 years’ median household income to buy an average home.
The study spanned nine countries comprising Australia, Britain, Canada, China, Ireland, Japan, New Zealand, Singapore and the United States. Among them, the United States had the most affordable major housing markets, followed by Japan, with Australia, New Zealand and Hong Kong all described as “severely unaffordable.”
A separate study by consultancy Oxford Economics that compared price-to-income ratios rated Hong Kong, Mumbai, Beijing and Shanghai as the world’s most expensive cities. According to the study, it takes more than 30 years for a household with the local median income to acquire a 90-square meter apartment in the four Asian cities, with their rental returns also “remarkably low.”
Government a ‘Worsening Problem’
The New Zealand Institute’s Oliver Hartwich, one of the Demographia report’s authors, told the Australian Financial Review that local government funding had contributed to the problem in Australia.
“In jurisdictions where local decision-makers stand to gain from new development, they will be much more eager to make it happen,” he said.
In contrast, local government budgets in more affordable housing markets such as Germany and Switzerland are dependent on “their ability to attract new residents and taxpayers, allowing councils to be more responsive and flexible to housing supply, resulting in lower house prices in the long run.”
The Organization for Economic Cooperation and Development (OECD) has called for action on housing affordability, arguing it is “key to achieving a number of social policy objectives, including reducing poverty and enhancing equality of opportunity, social inclusion and mobility.”
The OECD has ranked New Zealand as the most unaffordable housing market among its 34 member economies, with Australia ranked ninth.
According to the international economic group, a lack of coherent policy has contributed to the affordability issue, with many government measures worsening the problem, such as tax concessions for homeowners.
“Homeowners also often benefit from tax relief for the purchase of housing – notably mortgage tax relief – and favorable taxation of residential property,” the OECD said.
“The latter two instruments are typically not targeted to low-income households and actually tend to favor better-off households; in addition, they distort incentives to invest in other tenures and/or assets and actually often put pressure on housing prices.”
In Australia, tax benefits for investors known as “negative gearing” were a hotly debated topic of the 2016 federal election, with the Liberal-National Coalition arguing that the opposition Labor party’s plan to reduce incentives would lower house prices and increase rents.
However, the Grattan Institute claimed that “the combination of capital gains tax rule changes in 1999 and negative gearing has strongly increased the demand for investment properties. Investors compete directly with potential homebuyers, particularly for established houses. This makes it harder for first home buyers to secure a property.”
In Hong Kong, critics have argued that government and financial measures keep prices “artificially” high, regardless of supply, including constraints on the private housing market and controls on bank lending.
“It is ironic that when worldwide interest rates are low, it is almost impossible for middle-income people in Hong Kong to buy a flat,” Masterplan’s Ian Brownlee told the South China Morning Post.
He suggested a range of measures to improve affordability, including reducing government premiums from land sales, providing rental subsidies for low-income groups and removing restrictions on old buildings.
Demographia said while many governments had ignored the problem, there were notable exceptions, “such as Singapore’s half-century institutional initiative to keep housing affordable and the recent New Zealand government initiatives.”
“However, there has been little serious attention to the problem of severely unaffordable housing elsewhere, as governments have stood idly by as house prices doubled and tripled relative to incomes.”
Best Cities?
Demographia’s researchers described their findings as contrasting with the various “best cities” and “most livable cities” surveys, which “virtually never elevate housing affordability.”
“A city cannot be livable, nor can it be a best city to middle-income households that cannot afford to live there. Households need adequate housing,” the study said.
As an example, they pointed to the U.S. city of Dallas-Fort Worth, where housing affordability is far superior than in Toronto, which was rated as the “world’s best city” by the Economist in 2015. The U.S. city also enjoys less traffic congestion, despite Toronto employing various urban strategies.
The authors suggested the key objective for planners is “putting people over place” by avoiding urban planning policies associated with artificially raising house prices, specifically urban containment.
“For most of society, middle-income households as well as lower-income households, the best cities are where governments have overseen local housing markets competently, evidenced by housing that is affordable… In such cities, the cost of living tends to be lower, as households are able to afford a more affluent life,” they said.
Oxford Economics argues that rising U.S. interest rates will slow recent price rises by making mortgages more expensive, while demographic changes may slow growth in Asian cities such as Seoul and Tokyo.
However, the OECD suggests that higher interest rates will in the short term simply push households to cut back on other needs, such as medical care, nutrition and heating, before eventually considering housing of lower quality, smaller size and in poorer quality neighborhoods.
This can lead to residential segregation, an important aspect of housing quality, since “many of the areas that offer better access to education, employment and social opportunities are characterized by high housing prices and might not be accessible to low-income households, or be accessible at the cost of very long commutes.”
Solving Asia’s affordability crisis will not happen overnight, and will require both demand and supply-side measures. However, Australian and Hong Kong policymakers could do worse than study the housing markets of Singapore and Tokyo, where the average city dweller can still realistically dream of owning their own home.