Wednesday, October 29, 2008

Hong Kong Property Prices Falling Sharply

After rising in the first quarter, Hong Kong property prices have fallen sharply over the last six months or so. Although hard numbers are not easy to come by and are not always useful, estimates in the order of a fall of 20-30% from peak valuations are often being quoted. These numbers seem to be about right although there is considerable variation depending on which sector of the market is being looked at. Rentals have fallen by much lesser amounts, but are also trending downwards. Transaction volumes have also contracted significantly as buyers keep their hands firmly in their pockets.

As a homeowner who also has a leveraged portfolio of investment properties, this is considerably more significant to my personal finances than the 50-60% falls in the local stock market.

Banks are also cutting back on lending. They are doing this in three ways. The first is by increasing the deposit requirement (particularly for luxury homes). The second is by tightening the criteria for income coverage. The third is by raising the interest rates they are charging for new loans (which has an impact on affordability).

There is also rising anecdotal evidence that buyers are walking away from contracts rather than settle. It's cheaper to forfeit a 5-10% deposit than to buy a property that is not worth 10-20% less than it was when you signed the provisional agreement to purchase.

While the the financial pain I am experiencing is quite acute, I have no concerns regarding personal solvency given that I still have very healthy equity in all the properties we own, positive cash flows from existing tenants, a secure (although declining) income from my job and have been building up cash since the end of 2007 (the purchases made since then have been relatively minor after netting out positions sold). At some stage I will deploy the cash built up to acquire additional assets - when and what are yet to be determined - however, if the real economy continues to deteriorate the option of repaying some of our mortgages exists. While this would be sub-optimal from a longer term investment perspective, it would improve cash flow and reduce risk levels.

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