Monday, July 10, 2006

Property less compelling

I recently took another look at the Hong Kong housing market in the light of new statistics which have been released over the last two months. Specifically:

1. primary (i.e. new) apartments were selling a premium of, in some cases, 20-30% above comparable secondary (i.e. existing) apartment prices. Why anyone would pay a significant premium for a new apartment is beyond me. However, the developers have been cutting their prices and the premium is now appears to be much smaller (although I have not been able find any accurate data on what the current premium is);

2. property prices have softened in the first half of 2006 by 3-4% across the board (with the biggest falls in parts of the New Territories and the West Kowloon Reclamation area). Rising interest rates is the most widely quoted reason for the decline in prices;

3. the volume of property transactions has fallen in the second quarter of this year. Most notably, the number of transactions involving confirmors and other speculators has experienced a major decline. Declining volume is never a good sign;

4. there have been a reasonable number of defaults by purchasers of apartments in primary sales. Most of the defaulters are said to be speculators who purchased off the plan with the intention of reselling for a quick profit before the property was completed. With the premium for new apartments shrinking and the market as a whole experiencing flat or slightly declining prices, there were no gains to be had so they have been cutting their losses by defaulting on the completion (forfeiting their deposit).

There is also some suggestion that rising interest rates are starting to have an effect on consumer spending. This has yet to show up in any official statistics. Also, the volatility in the stock market in May and June would have affected confidence. Lastly, the days of having a positive carry on property investment are long past.

On the positive side, employment remains strong, both nominal and real interest rates are not that high (competition among mortgage lenders is still intense), there is upward pressure on wages, Hong Kong still has very high liquidity, real estate is still reasonably affordable by historical standards and China's economy is still growing rapidly. In other words, the economy looks sound.

Reports of problems with the US housing market (or at least parts of it) do not seem to have had any effect here. Nor has the implementation of austerity measures by China to cool its property market had any noticeable implications for Hong Kong.

In summary, the case for property as an investment vehicle of choice is not as compelling as it was 12 months ago and there could be better opportunities to invest later rather than now. Not a great conclusion given that I completed my latest purchase last month.

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