Home affordability ratio approaches danger level

A spike in Hong Kong’s home affordability ratio raises fears of future payment defaults by home owners.

The city's local home affordability ratio at the end of June rose to 41.24%, the highest in the last 11 years but still below the danger level of 50%.

Real estate analysts warn that the ratio may jump to an alarming 75% level in the future when Hong Kong’s interest rate rises in parallel to the expected US interest rate hike in 2015. Should this occur, the affordability ratio will jump to 49.35% and will rise in parallel with further interest rate hikes in the U.S. and Hong Kong.

The anticipated interest rate hikes can rapidly erode the financial capabilities of Hong Kong’s households to repay home mortgage loans.

The home affordability ratio is the household monthly income ratio used in calculating home mortgage loans repayment. It is widely used as the benchmark to determine the financial capability of a household to repay a home mortgage loan.

If the ratio is too high, this could pose a systemic risk to the property market when a surge in local mortgage loan rates may cause defaults on mortgage loans.

A Hong Kong property firm said that should interest rates rise by 2% starting in 2015 and assuming local home prices and average household income remain constant, the affordability ratio will jump to 49.35 % at that time.

If the mortgage rate increased to 5.4% while home prices decrease by 10%, the affordability ratio can still jump to 75%.

The government said in May that the home affordability ratio in the first quarter stood at 46.4% and warned that the ratio can surge to 60% if interest rates rise by 3%, higher than the average 20-year level.