Housing Price Hikes in Hong Kong Must NOT (Purely) Due to Insufficient Supply

[updated by adding MHIyoy v HRIyoy chart on Apr 20, 2019]

Similar to Australia, housing price in Hong Kong has been going up substantially in the past decade, and also similar to Australia, it is commonly assumed that it is caused by insufficient supply. However, as pointed out by Ong ViforJ (2018), the “claims that a housing shortage is the principal cause of a lack of affordable housing are unfounded.” because “it is well established in the housing economics literature that the price signal for the adequacy of supply relative to demand for housing services is RENT.” She has demonstrated that changes of real housing rent in Australia have been flat, in comparison with real price changes, and refuted the Insufficient-Supply-hypothesis.

How about the situations in Hong Kong? Figure 1 shows the indices of Housing Price (HPI), Housing Rent (HRI), Median Household Income (MHI) and Consumer Prices (CPI). In the past 15 years, when inflation was about 47%, housing price has shot up 510%!

Although housing rent has also gone up by 160%, the median household income has increased by 86%. That is, more than half of the housing rental increase can be explained by household income growth and inflation.

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Figure 1 The indices of Housing Price (HPI), Housing Rent (HRI), Median Household Income (MHI) and Consumer Prices (CPI) of Hong Kong, 2003- 2018. Sources: RVD, CSD of HKSAR Govt

Furthermore, it is reminded that since almost 50% of households in Hong Kong are living in public rental housing or subsidized housing, a large proportion of low- to median-income households’ housing needs have been satisfied by social housing. Therefore, the top 25-quartile household income (which grows much more than the median) should be used instead of the median household income so as to reflect more accurately the changes in the affordability of the housing demand. In other words, most of the rental growth can be explained by household income growth, instead of housing shortage.

If we take a closer look at the relationships between household income change and housing rental change, we can find a strong positive correlation between them. Figure 2 plots the MHR-yoy and HRI-yoy, and they track each other closely, especially in the past 5 years.

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Figure 2 Year-on-Year Change of Median Household Income (MHI-yoy) and of Housing Rental Index (HRI-yoy), 2004–2018. Source: RVD and CSD, HKSAR Govt

In fact, in the past 5 years, when housing rental index (HRI) increased by 26%, median household income increased by 21%. In other words, almost all the growth in housing rent can be explained by the increase in household income in this period. The correlation coefficient between MHI-yoy and HRI-yoy in this 5-year window is 73%!

Thus, concurring with Ong ViforJ’s (2018) conclusion, since the real housing rent increases in Hong Kong have been relatively minor compared to the nearly 510% surge in real housing price, and is found to be mostly explainable by the change of household income. In contrast, the actual numbers of housing units completed and available for sale in this 5-year period are increasing (Yiu, 2019), the housing-shortage hypothesis is prima facie refuted, and it implies that the main cause(s) of the housing price hikes must not be insufficient supply.


Ong ViforJ, R. (2018) Why rents, not property prices, are best to assess housing supply and need-driven demand, The Conservation July 30. https://theconversation.com/why-rents-not-property-prices-are-best-to-assess-housing-supply-and-need-driven-demand-100383

Yiu, C.Y. (2019) Housing Supply has been Increased, but Housing Price still Goes Up! April 3. (Chinese) https://vocus.cc/@ecyY/5ca493c2fd8978000134dc16

ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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