Bubbling Up“Bubble” is one of those dirty words that, when uttered in the same breath as one’s investments, sends heart rates pounding and sweat glands into overdrive. The most recent bubbles to burn a place in the collective memory include the Japanese economy of the early-’80s that led to the so-called Lost Decade and, perhaps most spectacularly, the dotcom bubble that finally burst around 2000. Of course, it was allegedly a busted asset bubble that left The Great Depression in its wake, so it could be argued there’s reason to worry.

Long story short, and variations and arguments aside, a bubble is basically a heavy trade in a particular asset where the price of the asset is higher than its fundamental value. “A bubble is a trough. Like 2003. The question of when a bubble bursts is when it will stop. When will it end, stagnate and start going up again? It’s all about confidence,” clarifies Richard Raymundo, director of valuation and advisory services for Asia at Colliers International. “The scary part is the down, down, down, with no end in sight.”

Following a burst of residential sales activity in the first quarter for 2012 — on the heels of latent buyer demand, more conducive bank lending policies and developer launches with prices set close to the secondary market — things have slowed down once again. According to statistics from the Hong Kong Monetary Authority, new mortgages approved but not drawn dipped in April after a spike in the months before. The bulk of the activity was also in the mass market on flats under $10 million. Luxury properties represented only 10 percent of the transactions, an indicator of volume stagnation. Luxury sales were weaker than in the same period in 2011 but prices registered a modest 2 percent increase. So does all this mean a bubble is forming?

“What’s interesting is that a ‘bubble’ is hindsight. You don’t know the bubble has burst until it actually [does] or until values have dropped 30, 50 percent. That’s when people start panicking. That was 1997, and SARS too, when values went down,” explains Raymundo. “What we have now is not the magnitude of that. Not up to this point.”

There are a lot of factors as play in Hong Kong property right now: a new CE, uncertain land supply policy, new development price rates, the European debt crisis and the traditionally slow summer season among others. Colliers is holding firm in its forecast of 13 percent price drop and 6 percent in rental rates in the luxury sector over the next year. Raymundo isn’t overly concerned just yet. “We’re looking at a 13 percent drop in the next 12 months. Is that a big correction in Hong Kong terms? No, it’s a standard blip.

“If Spain suddenly says, ‘Uh-oh, we’re in big trouble,’ and Greece says, ‘We’re out of the Euro’ then we will see some more movement,” he continues. “But there are some positives in Hong Kong. Interest rates are still pretty low. Everywhere else in the world they’re still at double digits. If you look at the Hong Kong model, yes, prices are expensive but rates are low and it’s been tested that it’s a place you can make money, either through rentals or capital appreciation. The wild swings make people rich.”

So why has bubble wound up in the same dirty word category as feminist? “I think it’s a dirty word when you’re stuck in it,” Raymundo states with a sardonic chuckle. “I think they’ve been made into this thing that is catastrophic. There are bubbles, and then there’s the end of the world. Same thing. But if you look at it, everything goes into cycles. Economies, property … you can’t expect everything to go up all the time. It has to correct.”

But it’s easy to flirt with a property bubble when so much of what causes them is based on buyer behaviour, some of it necessary. Bubbles go hand in hand with speculation and the idea of taking advantage of a trough runs contrary to long-term stability. Similarly, a lack of supply — or too much of it — can creates bubbles. Hong Kong currently barely meets half of the city’s annual supply demand, and because of that Raymundo isn’t surprised there’s a bit of a price bubble. “Everyone’s going after the same few units. Mainland Chinese buyers mean you get a bigger pool of buyers. And then there’s the interest rates.” And therein lies the rub. Keep the supply healthy and the basics of supply and demand would likely lead to flat prices with no growth and depressed prices. As Raymundo notes, finding a balance is the key; the last thing the government should do is dump 30,000 flats into the market. “It’s like being on a diet and suddenly going to a buffet. You’re going to get sick.”