Update on the Hong Kong Property Boom

I have written a number of posts on the Hong Kong propety market. In spite of the declines in global equity prices and continuing economic uncertainty in financial markets, the Hong Kong property market continues to show considerable strength. Like the real economy, it shows no sign of being adversely effected by the so called credit crisis. In fact it has risen strongly in the last six months. As things stand, it is difficult to see many reasons for the market to weaken and easy to see several reasons for it to remain strong.

On the positive side:

1. supply remains tight
2. affordability levels are reasonable by historical standards
3. incomes are rising (both salary increases and bonuses)
4. employment is strong (unemployment is at near record low levels)
5. interest rates are low (around 3.2%)
6. rents are rising
7. confidence is high
8. inflation is rising (currently above 3% and expected to rise further)
9. liquidity remains very high and there are no signs of banks restricting lending

On the negative side:

1. prices have advanced significantly over the last four years. Luxury prices have reached or exceeded the previous peak in 1997. Mid-market and mass-market prices are still below the 1997 peaks
2. uncertainty regarding the effect of a recession or near recession in the US
3. decline in equity prices reducing the amount of money available to invest and (possibly) damaging confidence
4. bank valuations are tending to lag market prices meaning that buyers need larger deposits. In the overall scheme of things, I view this as a healthy development

The other thing to consider is future developments. Although this is largely speculative:

1. the possibility of further cuts in interest rates in the US. Given the peg between the Hong Kong and US currencies, this would result in lower interest rates in Hong Kong as well. This would aid affordability
2. tax reductions and rebates, rates waivers and a re-introduction of the home owership scheme all providing a stimulus to demand. We will find out later this month when the government releases its budget
3. loss of confidence (more likely if the share market keeps falling)
4. the Hong Kong government releasing more land for residential development. There has been no indication that the government is intending to do this. Given that this was one of the causes of the post 1997 collapse in property prices and caused considerable political unrest, any increase in land supply is likely to be carefully controlled to prevent a repeat

Given that Hong Kong real estate remains our dominant asset class, this is an issue which I spend a proportionately (and appropriaely) large amount of time thinking about. As things stand, I am happy to continue holding the properties in our portfolio. I would be happy adding to the portfolio but only with reduced gearing levels to better manage the risk should there be downturn.