Saturday, March 12, 2011

Hong Kong property prices at all time high

Prices of residential property on Hong Kong Island have passed their previous peak set in 1997 according to an index compiled by Centaline (of Hong Kong's leading real estate agents).

Fourteen years is a long time to wait to recover to previous highs. A very long time. Of course, a person who had purchased at the time of the 1997 peak and held would have also received rental yield (or imputed yield in the case of an owner occupied home). Assuming a net yield of 4% during that time, the break even point for an ungeared buyer would probably have been reached some time in late 2006 (depending on how you do the numbers). Even so, that is still a long time to wait to "get your money back".

A couple of observations.

The first is that a property in 2011 is not the same property it was in 1997. Even if there have been no changes in its surroundings, at the very least it will have aged by 14 years - while it is very difficult to assess, depreciation is very real. That said, it also has to be asked whether the HKD is worth as much today as it was in 1997. The answer appears to be "not much different". The composite CPI stood at 113.0 at the end of 1997 and at 115.1 at the end of January 2011. This is not quite an apples-to-apples comparison (the peak of the property index was a few months before the end of 1997 CPI number and the January 2011 CPI number is a month behind the property market peak reached this month. None the less, there has clearly been at least some decline in the real value of the HKD during this time to partially offset the depreciation effect of time on the properties themselves.

The second issue is that property is not homogeneous. The number cited is an index for Hong Kong Island. Luxury properties have long since surpassed previous highs, indicating that at the other end of the market, there is still some catching up to do. Also, other parts of Hong Kong (most noticeably, the north west part of the New Territories) are still lower than in 1997 . This can crudely be attributed to supply (more new units being built off Hong Kong Island) and demand (more demand in the luxury and upper middle class segments of the market). The latter is also at least a partial reflection of the uneven distribution of the benefits of the economic recovery (boom!) subsequent to the Asian crisis and SARS in both Hong Kong and the rest of the PRC.

What does this tell us about future Hong Kong property prices? Not much. Properties may be expensive in absolute terms, but still remain affordable in relative terms if (and it is a big if) you have a deposit. However the relative affordability is largely due to the low interest rates applicable to mortgage finance.

While predicting the future direction of Hong Kong property prices is, at best, an exercise in uncertainty, given where prices have got to, the positive circumstances which have driven the increase in values since 2003 and the policy stance of the Hong Kong government, it would require a considerable degree of optimism to believe that prices will continue rising at the same pace. In contrast, it is much easier to envisage either stagnating or falling prices in the short to medium term future - rising interest rates, termination of US quantitative easing, increased supply and other factors all have the ability to adversely affect the market. The greater uncertainties are the issues of when it will happen and how substantial the decline will be. I have no views on either issue. However, the longer we continue to experience negative real interest rates and more than nominal inflation the better from my perspective.

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