Tuesday, July 28, 2009

The running of the property bulls

Residential property prices in Hong Kong have recovered most (but not all) of the declines which followed the onset of the credit crisis. Even rents have started rising again. Outside of the luxury sector, prices are still about 30% below the short lived peak of 1996/7. People looking for properties are finding supplies are limited and vendors are inflexible and unmotivated. In a word, it is a bull market.

What is driving the market? Supply and demand.

On the supply side, there is a shortage of both primary (new) sales and secondary sales. The pipeline of new developments is expected to remain low (around 10-12,000 new units each year from 2009-2012 which is below the rate of take up suggested by demographic factors). The situation will be compounded if developers hold delay selling projects. Secondary sales are also limited by a number of factors of which two are probably the most important: an expectation that prices will continue rising and an absence of alternative investments.

On the demand side, the jobs market has stabilised, mortgages are cheap (less than 1%), there is an influx of buyers from the mainland, the stock market has soared, there are few other places to invest and people expect prices to keep rising.

One rather simplistic way of looking at things is that Hong Kong has net bank deposits of HK$3 trillion earning very little (if any) in the way of interest. This is an all time high and that money is not going to sit around generating negligible returns forever.

So will property prices keep going up? How far?

Supply is not meeting demand. Affordability is high thanks to low interest rates. My expectation is that prices will rise further but I have no idea how much. One bank has forecast that residential prices will rise 31% between now and the end of 2010. It could happen - but I will not be taking out another jumbo mortage to join the party. My existing portfolio will give me enough exposure to that asset class.

No comments: