Assignment 1 (2023) (1)

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The University of Hong Kong *

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Finance

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Nov 24, 2024

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KS TSE 1 Real Estate Finance Assignment 1/3 HKU, K S Maurice TSE Note: Grace TSANG will announce the deadline for this assignment and provide you the instruction for submission. There will be a total of THREE assignments and ALL will be counted toward your final grade. This assignment carries 50 points and represents 5% of your overall grade. The Excel file “Dataset for Assignment 1” provides the data needed for the assignment. Question 1: Property Market Analysis (25 points) The Excel shee t “ Q1. Property Mkt” contains the following THREE data series downloaded from the HKSAR website: (1) Private Domestic Property Price of Class A, B and C for Kowloon (Quarterly from Q1 1990 to Q1 2019) (2) Hang Seng Index (Quarterly from Q1 1990 to Q1 2019) (3) Monthly Salaries of Supervisory Workers (Quarterly from Q1 1999 to Q1 2019) 1. Compare the performance of the property prices of Class A, Class B and Class C for Kowloon with the Hang Seng Index in terms of annualized rate of return for the following periods: (10 points) a. From Q1 1999 to Q1 2019, b. From Q1 2009 to Q1 2019 c. From Q1 2014 to Q1 2019 2. Evaluate the annualized growth rates of the average monthly salaries of Office/administrator supervisor, Accounting Supervisor and Estate officer/building services officer for the following periods: (10 points) a. From Q1 1999 to Q1 2019, b. From Q1 2009 to Q1 2019 c. From Q1 2014 to Q1 2019 3. How do the salary growth rates compare with the property price of Class A, Class B and Class C for Kowloon growth rates? (5 points) Question 2: Property Market Bubble Analysis (25 points) The Excel sheet “ Q2. Property Mkt Bubble” contains the median monthly household income by household size and the property price per square meter for Class B residential properties in Hong Kong Island for the annual period from 2001 to 2018. Consider the median monthly household income for a typical household with FOUR economically active members. Suppose the household can only commit up to 1/2 of its income to mortgage payment. The usual mortgage terms are 25-year, monthly payments, with mortgage rate equal to Prime Rate (5.625%) minus 2.5%, and 40% down payment. Assume that the household has enough savings to make the 40% down payment for property price.
KS TSE 2 (a) Determine the maximum home price the household can afford each year from 2011 to 2018? (5 points) Hint: Based on the median household income and the mortgage terms, the maximum mortgage an average household can borrow is determined as follows: ??𝑟𝑡𝑔𝑎𝑔𝑒 ??𝑎? = 𝑃?𝑇 [ 1 − (1 + 𝑟/12) −12𝑛 𝑟/12 ] Where r is the annual mortgage rate, n is the mortgage term in year and PMT is the monthly mortgage payment (b) Suppose the 4-member household wishes to buy and own a class B property in Hong Kong Island of size 65 square meters . Plot the time series of the affordable home prices calculated in (a) and the corresponding class B property prices for the period from 2011 to 2018. (5 points) (c) Determine the size of the price bubble for 2016, 2017 and 2018 calculated in (b). (10 points) (d) Using the bubble model discussed, determine the market-expected probability that the bubble would NOT burst in 2016/2017 and 2017/2018? (5 points)
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