Monday, January 21, 2008

More Optimisim On Hong Kong Property

The South China Morning Post carried an article about rising housing prices in Hong Kong. The chief analyst of Midland Realty (one of Hong Kong's largest agencies) was quoted as saying that he expected prices to rise by 25% over the next two years. This would leave average prices at around HK$6,000 per square foot, which is still lower than the HK$6,200 per square foot peak achieved in the 1997 boom.

UBS had a more optimistic forecast, predicting prices to rise by 50% by the end of 2009.

There are a number of differences between today's market and the one that prevailed in 1997:

1. demand is being led by end users with buy to let investors making up a significant but smaller percentage of buyers. The number of buy to flip transactions (called "confirmor" sales in Hong Kong) is relatively insignificant;

2. at 3.6 - 4.2% interest rates are less than half the rates prevailing in 1997 (8 - 9%). This means that buy to let investors have much better cash flow. It also makes a massive difference to affordability for both end users and investors;

3. economic fundamentals are better today. In particular the unemployment rate is much lower, the Government is running a huge surplus (likely to lead to tax cuts next month) and the GDP numbers (current and predicted) are solid. Put another way, the current economic boom is based on real economic and financial factors. In contrast, the boom that ended in 1997 was characterised by a lot of speculative froth;

4. investor expectations and sentiment are much more realistic this time around. In 1997 it was hard to find people who believed that property prices could fall. Ultimately they ended up declining 50 - 60% over the following six years. Today, people are much more cautious. By analogy, I know a few investors who are either realising some of their property investments now or who plan to do so later this year. Among my (admittedly very small) sample, they are in the minority. Most are still looking to add to their portfolios.

There is of course the possibility that the rosy forecasts may not come to pass. A change in sentiment is the single biggest factor that could hurt the market. As we have seen with the stock market, worries about the US economy sliding into recession have had an impact here. Whether that spills over to the property market remains to be seen.

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