Thursday, July 07, 2011

Hong Kong property prices retreating?

There is now plenty of anecdotal evidence that Hong Kong property prices are starting to fall in price. Whether this is the beginning of the bursting of a bubble (assuming it is a bubble in the first place) or merely a healthy correction is, at this point in time, something that could be debated endlessly.

From my perspective, a moderate pull back in prices is welcome - not only will it reduce the risk of further intervention by the Hong Kong government, but it will also reduce the risk of a more substantial crash at some point in the future. If the fall in prices is large enough, there is also the possibility of finding something to add to the private portfolio at a price that makes sense.

The SCMP's Property Section for this week carried an article about investors cutting prices in a rush to sell flats. This quote sums up the article:

"Flat owners are cutting prices to unload their investment properties because they fear the government will launch more cooling measures..."

I have long since made the decision to hold my portfolio through the market cycle and am not overly concerned at the prospect of a reduction in values. However, I would be concerned if rental levels fell to any material extent (and it has to be remembered that, in spite of complaints from renters) rental levels have not risen nearly as much as property prices and, in my experience, have probably not even kept up with inflation over the last several years.

I would also be affected, but less concerned, if HIBOR started rising by a material amount. There is no sign of that happening yet, but it has to be assumed that it will rise at some point in the future.

As an aside, at least one bank (HSBC) has announced another increase in the margin it charges on HIBOR linked mortgage loans. The once very meaningful difference between HIBOR linked loans and Prime linked loans is rapidly disappearing for new mortgage loans (existing loans are not affected).


Financial Samurai said...

Will be exciting to see the HK property bubble burst again just lie 1997!

But, this time.... I wonder if it really goes to hell as the Chinese stop buying too.

traineeinvestor said...

Bubble? What bubble?

Joking aside, I am making no predictions on the future direction of the HK property market. Rents are surging accross all levels of the market, interest rates for existing loans are not rising (mine are all still below 1%), employment is still high, we have 4%+ inflation, the population is growing at a rate which more or less matches the supply of new properties (depending on which figures you look at). So there are lots of positives and factors which make this a very different market from 1997.

There are also a lot of negatives - reduced availability of new finance, higher interest rates on new loans (but still less than yields and negative in real terms), likely increase supply starting in about threee years' time and uncertainty over the future demand from PRC buyers.

So who knows. I don't.