Buy or rent? That is, of course, the $64,000 – or $6.4 million – question in Hong Kong right now. Soaring prices have come under a modicum of control on the heels of crushing and/or stagnating cooling measures and tightened lending policies, but home prices are still high enough to force a rush to smaller, more affordable flats or the throwing up of hands and opting to simply rent a home.
So, given continued cooling measures, delicately easing prices and rents, an unlikely interest rate hike and more incoming supply, which is the better choice?
Unsurprisingly, “It depends,” says David Ji, director and head of research and consultancy for Greater China at Knight Frank.
“Firstly, it depends on if the person is treating property as a home or an investment instrument,” he says.
“As a latter the return isn’t great under the current tax regime. As a home, then renting can be an option if pricing isn’t attractive at the moment.
“Secondly, it depends on whether the buyer can put down a 40% deposit as currently required. If not, renting is a viable choice. Given the current high housing prices, not everyone can afford properties around the CBD. So renting does provide more locational choices.”
First Among Equals?
The general, unscientific consensus in the SAR is that individuals and families alike prefer buying to renting their homes. And it is this desire for home ownership that has prompted the government and the Monetary Authority to create policies designed to control skyrocketing home prices. Those policies have had middling results with divisive opinions.
“A 40% down payment isn’t really all that welcoming for an average family, even with two good incomes,” says one Sheung Wan-based property agent who wished to remain anonymous. “Two good incomes can total $2 million per year, and even that’s not enough to put a deposit down on a $6 million home. What is the middle or working class expected to do?”
Were Hong Kong to become more of a rental market than an ownership one it would be in good company. Strong investment locations such as Tokyo and Berlin are rental dominated and have fewer think pieces dedicated to affordability.
Renting does have its advantages, among them, higher flexibility, lowered financial stress and little in the way of responsibility for the property.
As of June, Colliers International’s projections for the rental market from the end of last year were on track: luxury rental values are off 4% and headed for 5% to 8%.
In the mass sector, rents are expected to drop up to 10% this year according to data from Knight Frank. That doesn’t make it a renters’ market, but the “leasing market [will] turn increasingly tenant-favourable against a surge in rental supply and creeping vacancy at the top-end of the market,” said JLL in its mid-year property review.
On the other hand, buying allows for personalised homes, stability and long-term capital gains (and there will be gains).
Sales are down 38.8% over the same period one year ago according to JLL, and in a climate of weakened sentiment, developers are luring buyers to the primary market by offering incentives – such as 80% LTV financing (at Bloomsway, Ultima2 and Ocean Wings) and some as high as 95%, and will continue to do so.
In addition, “some developers may turn to lease recently completed built-for-sale projects,” theorises JLL.
“The current market is an unpredictable one, with sales prices on a bit of a rally when everyone predicted a 10% to 15% decline, and rental prices starting to hold firm,” notes Savills Hong Kong consultant Richard Elms.
More supply in the pipeline (108,000 units between now and 2020) is effectively creating a rental market with potential buyers settling into a wait-and-see mode.
One of the strongest arguments for purchasing is gaining both equity and control at the same cost – or lower – than a monthly rental rate. And the fear interest rates are on the verge of moving from their present negative position dims each day.
“The Federal Reserve is … expected to increase [interest rates] by another 25-50 basis points in 2016. However, significant drops in Hong Kong’s home prices are unlikely as the impact on household mortgage repayment remains insignificant,” said Knight Frank in its May market report.
‘There are no real protections for tenants here,
which is a huge downside to renting in Hong Kong.’
Bending the Rules
Then there’s the law. One of the things that makes Hong Kong such a popular investment destination, in good times and bad, is its transparency and rule of law. Buying a property, regardless of the complicated paperwork and some historical peculiarities, the rules are clear and contracts are binding (just ask you mobile provider). In rentals, however, things can be quite different.
Beyond setting high down payment regulations, “protecting the banks”, and making it nearly impossible for those banks to lend, the Sheung Wan agent, who lived for many years in the US, points to a weak regulatory body for the real estate industry and as many loopholes for landlords as there are regulations for vendors.
“There are no real protections for tenants here, which is a huge downside to renting in Hong Kong. Landlords have all the power and so you wind up with renters house-hopping every couple of years – maybe every year. And no one is ‘breaking the law’ such as it is. Not all landlords play fast and loose with the rules, but it does happen and there’s nothing anyone can do about it.”
So rent or buy? Joanne Lee, associate director of research and advisory at Colliers, goes out on a bit of limb, theorising the residential market’s recent stabilisation demands both.
“Overall residential prices have dropped 11% since their September peak. We believe the residential market will achieve a soft landing considering the stretched affordability, increasing supply and interest rates turning to positive territory, perhaps in 2H 2018. Under the current market conditions, it would be better off for young [buyers] or newly-weds to rent so as to avoid the risk of falling into negative equity.”
Good advice, but ultimately it depends.
“My answer is always the same. You need to look at your own situation, take into consideration how long you plan to stay in Hong Kong, what your financial security is and take into account what the worst-case scenario is (losing your job, interest rate hikes, etc),” stresses Elms, adding that in ideal circumstances (permanent residency, stable employment) money going into a mortgage should pay off in terms of equity or gains. Rent paid is gone forever.