Own goal
As the Hong Kong residential property market brushes against its 1997 highs, the prospective flat buyer could be forgiven for a little vertigo when considering the breathtaking plunge into home ownership.
Residential prices are high. A bellwether 843 sq ft flat in Taikoo Shing costs about HK$7 million. The market is volatile. Prices for mid-sized flats in Hong Kong have moved an average of 14.7 per cent a year since 2000, according to government data.
There is also, of course, increasing speculation that Hong Kong property is overdue for a correction. In the past 15 years, Hong Kong has weathered the Asian financial crisis, the 2001 technology recession, the 2003 Sars outbreak and the 2008-09 global debt crisis. Each event walloped the real estate market, sometimes tipping homeowners into negative equity, and Hongkongers reflexively look around the corner for the next market-levelling moment.
In that context it is worth asking whether it makes financial sense to own your own flat.
According to government data, prices for mid-sized Hong Kong Island residences rose about 77 per cent in the period 2000 to 2010. That is a healthy return, handily beating the gains of the Hang Seng Index of 54 per cent over the same period.
But there are nuances. Looking again at the hypothetical 843 sq ft Taikoo Shing flat, the unit would have cost HK$4.25 million to buy in 2000, estimates Mabel Yeung, owner of New Homes Property. Adding to that sum stamp duty of about HK$120,000 and cumulative management fees of HK$180,000, the total cost would be HK$4.65 million (not counting repairs, agency fees or other taxes).
If the owner sold the property last year, he would have obtained a price of HK$6.95 million, leaving a profit of HK$2.35 million, estimates Yeung.
If instead, the person used that money to rent and invest, Yeung estimates he could have leased a similar flat for HK$2.3 million for 10 years. That would have left HK$1.95 million to put into the Tracker Fund, which tracks the Hang Seng Index. A HK$1.95 million investment in Tracker in 2000 would have generated profit of HK$3.3 million, including dividends, if cashed in at the start of 2010 - or HK$1 million more than the gain for holding property.
This is a rough calculation. The scenario does not capture the impact of leverage. Banks prefer to lend against property than other assets, which is attractive given that property appreciation usually offsets the cost of the mortgage. Indeed, in a low-interest-rate environment, people can often secure mortgage payments equivalent to or less than the cost of renting.
But the numbers indicate that Hong Kong property is a mediocre asset when viewed solely on its investment potential. Property is notoriously procyclical. It is exactly when property prices plummet that Hongkongers are most at risk of losing their jobs or seeing other investments in the local share market getting knocked back.
Property is also frustratingly hard to sell in down markets. It's illiquid and it ties people down. People who own property are less able to move to another city to find work during times of unemployment.
However, for most people, home ownership is more than a financial matter. Wrapped up in what is typically the biggest financial decision of one's life are emotional needs for stability and security.
There is also an inescapable sense of annoyance among renters for having to turn over so much of their income to a landlord.
Owning is deeply respectable in Hong Kong, where 'home ownership is a huge part of the culture', says Charles Chan Chiu-kwok, managing director of Savills Valuation and Professional Services.
Home ownership is similarly socially prized in the United States. Last year, Fannie Mae's National Housing Survey showed that - even after the property crash sent thousands of homeowners into negative equity and triggered countless more foreclosures - Americans still believe that home ownership is a great aspiration.
Many British families want to own their homes, and that demand has led to a doubling of house prices there in the past 10 years.
And if Hongkongers are looking to buy property to foster a greater sense of security, they perhaps have good reason. The city's tenancy rights are very pro-landlord.
'In Hong Kong there is no security of tenancy. If you have a tenancy for a term of three years, you have to renew it at the end of the term and renewal is not guaranteed,' says Chan.
The introduction of the Landlord and Tenant (Consolidation) Ordinance in 2004 means tenants no longer have a statutory right to renew their lease at market rates. It also allows landlords to evict tenants far more easily than before.
Renters should also know that any renovations, improvements, or money invested into fixing up the flat are forfeited once a tenant moves and, in Hong Kong, a landlord can evict a person for making unapproved changes.
The landlord also receives all the tax benefits of owning a property. The list goes on.
Prospective buyers have a lot to digest. But on the basic matter of whether property makes financial sense, a little clarity always helps.
'The fundamental question that we ask initially is, What is the purpose of buying the property?' Lucy Zheng, vice-president of financial planning firm ipac, asks. 'Do you want an investment or a home?'
