Sunday, November 11, 2007

HK Property Prices Still Rising

Hong Kong property prices have risen strongly this year. This is mostly good news as our portfolio is heavily weighted towards this sector. The decline in certain sectors of the United States housing market and the credit crunch have, so far, been almost a complete irrelevance to Hong Kong (and the rest of Asia generally).

Instead, strong economic growth, falling unemployment, rising incomes, robust stock markets, high levels of monetary liquidity, low real (and nominal) interest rates and an absence of excess supply have all contributed to give people both the means and the confidence to either enter the property market for the first time (whether as an owner occupier or an investor), to upgrade an existing home or to add to an investment portfolio.

Will these conditions (and the upward trend in prices) continue? Here are some issues:

1. China: the economic growth story in China is one of the biggest drivers of the Hong Kong economy. If China's economy slows, this may have a knock on effect for Hong Kong;

2. United States: much has been written about the declines in certain sectors of the US housing market and the sub-prime credit crunch. There has been no indication that this is having any effect whatsoever on Hong Kong;

3. Supply: supply numbers for 2008 and 2009 are generally predictable and do not show any large increase in supply;

4. Cost of Funds: interest rates are low and are as likely to fall further as to rise. It is possible to get funding on residential mortgages at around 4.5% pa. In contrast, bank deposits pay a pitiful return which is well below the rate of inflation making bank deposits a losing investment;

5. Affordability: in spite of rising prices, home ownership is still affordable (very affordable compared to the bubble of the mid 1990s). In many housing estates, it is still cheaper to own than to rent;

6. Rents: rents have risen at a much slower pace than property prices since the bottom of the market in 2003. However, they are still rising and this is a positive factor for owners of rental properties;

7. Liquidity: HIBOR fell to below 4% last week. Banks are engaged in an intensive battle for market share. There is no shortage of liquidity in Hong Kong's financial system.

There are of course other factors which can influence the direction of the property market. However, absent either a slow down in China's economic growth story or an increase in supply of new units (which would be at least three years away because of the lead time for new developments), I continue to remain optimistic about the Hong Kong property market.

3 comments:

Raphael said...

Hi Trainee,

I just bought a property myself in Kennedy Town. I paid 3.6M for a 2 bedroom place and was amazed to get a call from my agent about 3 weeks after signing the S&P with an offer of 4M from another buyer (prior to settlement!). I could have flipped it, but having already paid stamp duty, and being more of the buy and hold type I decided not to.

Anyway, I agree that with interest rates so low property will continue to rise over the next few years (I've heard predictions of 20% p.a. for the next 2 years in the general market). With the US in a bit of a bind, it's kind of forced to keep interest rates low to prevent their economy from going into recession. This in turn forced HKMA to pump liquidity into the system to keep the HKD in line with the USD, and bingo, rates have come down again.

BTW interest rates for residential properties are now about 4.1%, although if you'd signed about a month ago (when the discount from prime was larger) you could get as low as 3.93%.

Pretty amazing given that rental yields are around 5%, not the mention the tax advantage :)

traineeinvestor said...

Hi Raphael

Congratulations on your purchase. Sounds like a good deal.

Although I remain bullish on HK property (for the reasons set out in my post), I would regard 20% pa for the next two years as being an aggressive target (which has not stopped it happening before either in Hong Kong or other markets).

On interest rates, the drop in the margins makes new mortgages cheaper than old mortgages. Some of mine are getting to the stage where refinancing would pay.

I tend to ignore the tax aspects in Hong Kong. The tax rate is so low and the range of deductions is so limited (unless you buy through a company), that I tend to ignore that factor in Hong Kong.

Are you going to buy another property? It can become rather addictive :-)

Raphael said...

Hi Trainee,

Regarding tax, if you live in your property you can claim up to $100,000 deduction p.a. Coming out of your top bracket (at 17%), that's $17,000 of tax savings per year, about $1400 per month, which is certainly not bad and often makes property cash flow positive (when you factor in the savings in rent). So there is the double bonus of positive cash flow and capital gains. And I thought that Kiyosaki's claims of having both were just marketing spin. (There's no way you're going to get positive cash flow in Australia right now).

Indeed property is addictive. This is my second one (I have one back in Australia). Buying is always a very stressful experience , at least for me. But the satisfaction of having new property (not to mention the profits) is worth it!

For this reason I still have a big preference for property over stock. It's a much bigger motivator. Plus you get the gearing without needing to worry about margin calls.

I'd like to buy another one ASAP but I need another 6 months at least to get the cash reserves up to a comfortable level :)

My girlfriend (who is from HK) has a property that has gone up substantially over the past year. She's thinking of moving in to a cheaper place and renting out her apartment (so she can give more money to her mum each month, they take filial piety to a new level here!!!).

Anyway, I'm trying to convince her to refinance her existing place and use the cash as a downpayment for another cheaper place. She'll end up better of in terms of cashflow, and with a greater exposure to the market (for better or worse). Still trying to convince her, I guess not everyone is as huge a fan of leverage as me :)