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.