The aggressive bidding for a Tsuen Wan commercial and residential site, which sold for 13 per cent more than top expectations, reflected resilient market sentiment. A similar enthusiasm also was to be found in prices and rents in the mass residential market in July. According to a Centaline Property Agency index that charts average sale prices at 85 large housing estates, flats on the secondary market broke a record set in October 1997, and rents set a record, too. In the first six months of the year, the index of residential property prices rose by 10.5 per cent and rents gained 9.5 per cent. It is easier to say what is driving the rise than when and how it will go into reverse, as it must one day.
It is not taking the classic shape of a property bubble. Rising prices have put the down payment and repayments required for a mortgage beyond the means of an increasing number of people, but the fundamentals of the market still confound fears of overheating. The number of buyers putting flats back on the market for a quick profit has not been large enough to drive prices up. Buyers are not highly leveraged, with new mortgage loans averaging not much more than half the property's value. Nor are people overcommitted, with the average household spending 43 per cent of income on servicing a mortgage. Thanks to our currency peg, the cost of serving a typical loan would rise to 55 per cent if the US were to raise interest rates by 1 percentage point, though this is unlikely any time soon. Even this would be unlikely to result in a high rate of defaults.
Nonetheless, the sustained rise in prices is cause for concern. Low mortgage rates and hot money, especially from China, are stoking the momentum. A combination of miserly interest rates on cash and unattractive stock-market returns are driving people towards investment in a new flat as a store of wealth. But why Hong Kong, given that it is not alone in these respects, and its growth prospects through trade are clouded by softening demand in the developed world? Unlike many other developed countries, it is debt-free and cashed up enough to be seen as a preferred safe haven. However, the good days for property cannot last forever. Like the equity and cash options that investors are bypassing for the moment, the market can fall, or mortgages can become less affordable if conditions change. Banks, too, might not emerge unscathed. For the sake of both borrowers and lenders, the authorities cannot afford to relax their efforts to maintain a stable market.