With mortgage rates at an all-time low, you are literally paying less to own a property than to lease one. So why do so many of us continue to rent? Alex Frew McMillan reports
With mortgage rates running at historic lows, buying a property is becoming more and more attractive. But not everyone believes this is the time to jump into the market.
The basic premise is simple. The housing problems in the United States have caused the U.S. Federal Reserve to slash interest rates, with the central bank trimming rates five times in the last six months.
Hong Kong banks have more or less matched those cuts. So as the federal funds rate fell from 5.25 percent to just 3 percent this year, including a huge 75 basis point emergency cut in January, the mortgage rate in Hong Kong has dropped too.
The best rate from HSBC, the Bank of China and Hang Seng is now at 5.75 percent, dubbed “big prime,” with the “small prime” of the smaller banks a little higher, at 6 percent.
Reasons to buy
Most banks base their mortgages on a calculation that takes prime and then deducts 2.75 percent to 3 percent. So the interest on a home loan could run to around 3 percent – or even less if you get on well with your bank.
“We are facing the lowest mortgage rate we ever had,” Ricky Poon, the executive director of residential sales at Colliers International, says. “But we are expecting the prime rate to be cut again within another two to three months time.”
According to Midland Realty, the drop in the rate you’ll pay on a mortgage means average monthly repayments are now below current monthly rents in around 40 percent of the housing estates that it tracks.
Hong Kong is also seeing negative mortgage rates, a situation where the interest on a mortgage is lower than the rate of inflation, currently at 2 percent but forecast to rise to around 4.5 percent during the year.
The interest rate declines also mean anyone with money in the bank is effectively losing it. The bank rate on deposits is below the rate of inflation, what’s called a negative real interest rate. It’s better to have money in a building than in a bank.
Both property prices and rents are rising at the moment. But property prices tend to rise first, with rental increases following later as new investors price them into their purchases.
There’s not a lot in it at the moment, however, which suggests rent rises could soon surpass price increases. Midland Realty says residential rents rose around 20 percent last year, while property prices rose around 23 percent.
Reasons to rent
The main problem with buying a property is, of course, raising the money. While mortgage payments may not be too burdensome, it can be difficult to raise the downpayment.
Most borrowers can qualify for a 70 percent loan on a property, meaning they must put down 30 percent of the purchase price in cash. It’s also possible to get a second mortgage via the government that boosts the loan to 90 percent or even 95 percent of the price, meaning the downpayment is only 10 percent or 5 percent.
“If people have a million dollars spare cash then I would definitely still advise them to buy a property for HK$3 million,” Caroline Ergetie, who runs the brokerage House Hunters, says. “They can do it up themselves, and they are paying the mortgage as if it was a rental.”
But we don’t all have HK$1 million hanging around. It can be difficult to raise the cash, and there’s also an opportunity cost to putting it in property – you could be investing the money elsewhere. Then again, the tumultuous state of the world’s stock markets this year makes it a lot less attractive to put your money there.
Poon believes the recent stock market volatility may make buyers more willing to negotiate. “In the last quarter of ‘07, people were sticking on asking price quite squarely. Nowadays I think the attitude has changed – it is quite a good time to negotiate.”
But the numbers don’t bear out such an optimistic outlook for buyers. The number of home sales in January hit 14,786, the second busiest month since July 1997.
The number of speculators is also on the rise. There were 420 transactions involving confirmors in January, the highest rate since July 2005 and up 38 percent month over month.
A confirmor sale is one in which a buyer, who has signed a Sales & Purchase Agreement on an apartment, flips it and sells it on before they have even completed the original purchase.
Such situations suggest the market is again starting to move rapidly, just like it did towards the end of last year. It took a break over Chinese New Year, and local buyers seemed to lose a little of their appetite over the unexpectedly cold winter, but they are coming back with a vengeance now the weather is warming up, and spring is here.
Dan Rupp, an American expatriate who works in finance in Hong Kong, says he is more than happy to rent.
“I locked into a lease about a year and a half ago, and I think I got an attractive rental rate based on what my neighbours and my friends are paying, so I was less inclined to buy,” Rupp, who rents an apartment in Mid-Levels, says.
“Now I want to wait and see what the reset is,” he adds. “If it is a market rate increase than I’m fine paying that rental rate. But if it resets to a more normal rental rate then I would consider going elsewhere.”
Problems facing first-time buyers
Some renters are not keen to invest in Hong Kong’s property market now, for a variety of reasons.
“For a lot of people, it is just too high you can’t get in right now – the market is too hot,” Ergetie says. “A lot of the HK$2 million properties are being bought by bachelors or young couples coming to Hong Kong. The economy is great right now so we have had an influx of that category coming to Hong Kong, and they get filled up very quickly.”
Other people just entering the job market bring more debt from college costs than assets, meaning they have to rent. They look to build up bigger salaries and pay off those debts before they can buy.
There are also transaction costs involved in buying a property – broker’s fees, legal fees, and a sizeable stamp duty if the apartment is worth more than HK$2 million. It can take a while for any price rises in your apartment to offset those costs.
So brokers typically don’t recommend property purchases for people who aren’t planning to stay in a city for long. Many say you shouldn’t plan on owning a property for less than five years.
“If you are expecting to do a quick in and out in two years, then don’t buy,” Ergetie says. The risks are too great, and the market may drop. “But if you are here for the long term, you can wait five years, and if the market does come down, it will eventually come back.”
For Rupp, the main reason he doesn’t want to buy is that he believes the monthly mortgage he could afford would buy him a smaller place than he currently rents.
“It is more a question of whether it is worth owning a place to take a standard of living reduction, and at this point in my life it’s not worth it,” Rupp explains.
He also isn’t convinced about the merits of the Hong Kong market at the moment.
“For purely a yield perspective, you can get better yield elsewhere, and you can get a property exposure through property stocks.
“Maybe it makes sense to buy if you want a leveraged exposure to Hong Kong property,” he concedes. “But I don’t need to have leverage on Hong Kong property right now. The uncertainty in the last few months in the equity market could spill over into the property market, which is something to watch near- to mid-term.”
At the start of this year, there were many rosy forecasts about the Hong Kong property market. Pundits were predicting that, thanks to the low supply of new properties coming on the market, the city’s property prices would surge. Low interest rates and the weak Hong Kong dollar are also likely to attract buyers from overseas.
But it is becoming clearer and clearer that the U.S. economy is in recession, something that has yet to be factored into many forecasts.
Still, there are plenty of bullish predictions about what lies ahead. Colliers anticipates gains of another 15 percent to 20 percent in capital values this year, with rentals rising another 10 percent to 15 percent.
The longer renters remain on the sidelines, the more expensive taking that first step on the property ladders becomes. They may eventually find themselves looking to buy at much steeper prices than they’re seeing now.
“It’s entirely possible,” Rupp says. “I could be sitting on my hands forever, but I am happy where I am.”