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Overpriced,
Over-Leveraged and Over a Barrel
Can Hong Kong’s property boom leave the bubbles in the champagne glasses this time?
| Text : Neil Runcieman | Photo : www.thinkstockphotos.com |
It’s rarely a good thing when the business of buying a home moves from the deceptively spacious comfort of the property section to its occasional pied-à-terre on the front page — a uniquely appointed location with direct access to armed conflict and breathtaking views over natural disaster. The default setting for “news” is “bad”.
Yet property, or more correctly the price of property in Hong Kong and its gravity-defying surge back towards the giddy heights of the mid-1990s, has been front-page news in Hong Kong since well before the end of the first of Hong Kong’s new years and remains a hot topic after the second. Only for once the headline-grabbing numbers behind the stories have consistently defied front-page convention. This news has been consistently and spectacularly “Good”.
You think not? Then you can’t be a property owner, buyer, agent, developer or investor. If you were, your biggest problem right now might be trying to keep the smile off your face. Prices have increased 27 percent on average in the past year and the government will be happy if it can manipulate the 2010 figure below 15 percent.
But nothing is ever this good without some diabolic trade-off, so there must be a catch, right? Yes of course there is. Well, maybe.
Financial Secretary John Tsang addressed the issue but shrank from the word in his 2010 budget speech: “If we find out that (stable and healthy growth in Hong Kong’s property market) cannot be achieved because of a certain situation in the market, we will roll out new measures.”
For Ricky Poon, executive director, residential sales at Colliers International, there are no great mysteries to unravel, nor any reason to shrink from the “B” word: “A bubble only happens when people can’t afford to pay their mortgages. The government will regulate by trying to balance the market and making more land available so that all the developers have their land banks stocked. That would keep price growth in the five to 10 percent range, which is healthy. Constant 20 percent growth is dangerous.”
And before all this “certain situation” talk bubbles over into panic, it’s worth noting some underlying positives that distinguish Hong Kong’s Bubble 2010 from the still memory-fresh horrors of the 1997 beta version.
Firstly, borrower leverage ratios look good. Much of the damage in 1997 or 1998 was suffered by investors who leveraged rising property values to fund additional equity punts and vice versa, so when both went into freefall, so did what was left of the investor.
In Bubble 2010, however, the bank figures show both foreclosure and negative equity levels down by nearly half from a year earlier. The evidence suggests that Hong Kong went to school on its mistakes.
Then, there is the information from Sino Land (notwithstanding the reappearance of the Speculator Flip1) that four out of five current buyers intend to live in their property. As such, their approach to calculating mortgage limits will be more risk-averse than is typically the case for a speculator.
There is the massive and ongoing China factor. According to Centaline, 18.1 percent of all luxury apartments priced less than HK$10 million sold in Hong Kong last year were bought by mainland buyers, and the hot money is still pouring in. And it’s also worth mentioning the much- publicised return of HSBC’s senior corporate management to Hong Kong, which has undoubtedly served as excellent brand-image marketing for Hong Kong luxury property. If the HSBC top tier is coming here, then more senior executives with big fat expat housing allowances must surely follow.
Publicly, the heads of the bid developers are projecting general price increases of up to 20 percent again this year. Ricky Poon expects prices to continue to rise through the first half of the year, but says that the market is already showing signs of cooling-off. “There has to be a cooling-off after a phase like this, and it will kick in when interest rates go up - probably in the third quarter,” he says.
Despite that word of caution, Poon believes the downside has been overstated: “We don’t think the interest rate will increase before the third quarter and new supply is limited. There will only be 18,000 to 20,000 new units available each year for the next two or three years.”
As for the negatives, there is absolutely nothing the HKMA can do about a potentially huge China property bubble beyond hoping for the best and planning for the worst.
And the US-dollar peg will surely take centre stage again if the currency’s current travails continue. It could also wreak havoc if the US dollar sinks into an inflationary money-printing cycle, bringing the dollar down still further, creating merry hell with the price of crude, and — well, and so on.
And at a local level, over-valuation in the luxury market on the one hand, and first-time buyers already stretched to their limit on the low interest rates on the other, are both causes for concern.
For those still seeking to enter the market, most analysts remain “short-to-mid-term bullish”. Prices may be high, but opportunity is still there, as Ricky Poon underlines: “Mortgages are available; most people had salary increases last year and first-timers can certainly look at the New Territories, where a 750 sq-ft. unit costs only HK$2.5 to HK$4 million. That’s where the activity is now and the values will rise as the communities and services evolve.”
Despite the booming New Territories, Poon still advocates Hong Kong Island for lifestyle and scarcity value, but overall his advice is reassuringly simple: “Always buy the best you can reasonably afford, but if you can’t afford what you want, scale down and buy sensibly. There’s still plenty of opportunity out there.”
1 The speculator pays (a) stooge(s) to queue for new apartment(s); speculator sells on immediately for a tidy instant profit: legend has it that the process could be repeated more than half a dozen times in the first night — but the world’s full of more-than-six-times-a-night legends
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