The Upside of the Downturn

Sub-prime. Credit crisis. Inflation. Earnings downgrades. Falling real estate prices. All the things that have made the headlines for the last few months. Sitting in Hong Kong, I can read the headlines and feel the pain in my unit trusts. But there is an upside: real estate prices may be falling in parts of the United States but they have gone up in Hong Kong.

Mortgagee valuations have risen this year already. Based on recent sales data, the mortgagee valuations are still below market. There are several reasons why real estate prices are still rising here (in spite of all the negative news). The obvious one is interest rates. The cost of mortgage funding is now around 3.8% for new loans (+/- a bit depending on HIBOR on the day). The very low cost of borrowing is driven by two factors. The first is liquidity. Hong Kong is drowning in the stuff. The banks can't lend it out quickly enough. The second is the peg. The Hong Kong dollar is pegged to the US$. In order to keep the peg, whenever US interest rates fall, Hong Kong rates should, in theory, follow reasonably closely.

When a number of other factors are also making positive contributions, it is easy to see why property prices have been rising. We have low and falling unemployment, rising real wages (especially for middle and upper class wage earners), some inward investment from China, tax cuts in the form of partial waivers of government rates and a government that has learned from its mistakes in 1997/1998 and kept the supply of new land at a sensible level (currently slightly below historic take up levels).

The only foreseeable negatives are the potential for a loss of confidence stemming from either the problems with the US economy (credit crisis) or a downturn in the all important PRC economy. Any others?

That said, the increase in property prices has been quite rapid and I have become increasingly cautious in my attitude to further investment in the sector. Any further potential investments in Hong Kong property will be considered with greater scepticism than in the past. But, if not property, what else?