Real estate - safe as houses, or overblown balloon?

PUBLISHED : Monday, 18 February, 2013, 12:00am
UPDATED : Monday, 18 February, 2013, 4:26am

Bull view: quantitative squeezing

There has been a lot of talk about the housing market bubble in Hong Kong and that interest rates rises may precipitate a price collapse soon. I disagree and here's why.

We live in a time of high inflation and low interest rates. The world is awash with cash thanks to the money-printing programmes of the world's biggest central banks (Japan, the US, the euro zone), and even some emerging market countries).

First, most "safe" or investment grade instruments such as deposits or government bonds cannot return above the rate of inflation. This explains why Hongkongers have been buying high-yield bonds and, more recently, equities. These can generate returns above inflation but carry higher corporate, credit or supply risks. Property does not suffer these drawbacks and offers better returns than bonds and deposits.

Second, property is a great hedge on inflation, always a potential problem, thanks to global banks' unprecendented and radical use of quantitative easing. While rental income rises alongside inflation (as any leaseholder knows), a 10-year bond issued today with a one per cent coupon will yield that same one per cent for the next 10 years.

Third, with global central banks in a "race to debase", money supply growth should continue to run high in the double digits. If the free market were to determine interest rates, fast depreciating currencies would lead to sky-high interest rates to compensate for the risk of lost purchasing power. However, central banks will hold interest rates down near zero to boost growth.

Sceptics talk about the possibility of a housing market bubble but they are second-guessing thousands who affirm the valuations of today's market in trades involving millions of dollars. The affordability of Hong Kong - in terms of how much a mortgage costs relative to an average family income - is well within historical norms.

A far more vexing matter is the possibility of rising interest rates. Hong Kong housing prices are highly sensitive to interest-rate rises. Rates have been low for a long time and will eventually rise. But for now, the world's main central banks all indicate that low interest will stay for a while. This includes the US Federal Reserve, which effectively sets Hong Kong rates, which has committed to keep rates down at least until 2015.

Hong Kong property will fall, but only after another 20 per cent-plus rise has kicked in over the next few years.

Eric Wong is chairman of Bricks & Mortar Management


Bear view: realty bites

I don't see Hong Kong residential property as a good investment. A good investment provides a generous return for low risk, which is the exact opposite of what Hong Kong flats offer investors.

First, the Hong Kong government is trying to deflate this market and has been doing so since November 2010, when it introduced a stamp duty of up to 20 per cent (if a home is resold within six months of purchase).

In October 2012, the government upped the ante by introducing a buyer's stamp duty of 15 per cent of the purchase price of homes in the city, payable by all non-permanent-resident buyers. One can't blame the government for this. Between 2004 and 2012, the price of a typical middle-income class apartment in Hong Kong (e.g. a 600 sq ft unit in Taikoo Shing) rose 137 per cent to HK$6.3 million.

Let's give some perspective to what this HK$2.7 million price appreciation means. The sum equals 21 local university degrees, 368 return tickets to Thailand, 1,105 years of rice consumption for a household of three, 5,128 trips to the doctor, or half a million trips on the MTR. Hong Kong property valuations are unmoored from reality.

The supply and demand outlook for property investors is also turning. A key reason that residential prices went up so sharply was because the previous government had failed to supply land at a time when the economy was expanding. The number of units available for sale fell from a peak of 30,000 units in 2004 to just 12,000 units by 2011. But, starting last year, the floodgates reopened. Land sales in 2010-11 were 69 per cent higher than the average seen in the previous five years. Chief Executive Leung Chun-ying's policy address in January proposed - among other measures - a giant reclamation, filling the gap between Lamma and Lantau islands.

Meanwhile, the spectre of rising interest rates forever lurks. Almost all Hong Kong mortgages are floating-rate, and these rates can only go up.

For all these reasons, and more, I project a one per cent price appreciation for houses, per annum, between 2013 and 2015. Investors will find it difficult to exit without a loss, much less turn a profit, during the first three years of purchase, or the period for which the special stamp duty will be in effect. Net rental yield of less than one per cent offers little protection against interest rate hikes, which will almost certainly arrive with the next three years.

This is why, these days, whenever someone asks if they should buy their own home I reply: "Yes, if you can afford to see it as an expense, not an investment." And why not? People pamper themselves with cars, even though they know values will fall. But if one is looking for a real estate investment, I suggest looking elsewhere.

Nicole Wong is a CLSA property analyst