The View

Hurrah! Hong Kong’s property market is leaking hot air - and we should be pleased

Price reversion that is helping return housing costs back to more sane levels is good news

PUBLISHED : Wednesday, 11 May, 2016, 11:36am
UPDATED : Wednesday, 11 May, 2016, 11:55am

Do you just love paying more for something you really need? No, I thought not. So, how to explain the “scary” crop of stories informing us that there is a major problem because Hong Kong property prices have started slipping?

The answer is that there is nothing more illogical than the way otherwise sensible folk approach investment in the property market. This is particularly worrying as for most people a property investment is the largest they will ever make.

A majority can only afford to make one property investment and that is to buy a home. In other words this is far more than a mere monetary investment; buying a home involves so many other factors. Yet when people talk about investments in their homes they almost always focus on the property’s monetary value.

In some ways this is logical because if your biggest asset is your home you will naturally be interested in its value. On the other hand a home, precisely because it is a home, is likely to be one of your least tradable assets.

Assuming you like your home, its value stretches well beyond the sale price because this is where you live and have made a life, it is also likely to be in an area close to your children’s school, in a preferred neighbourhood, the list goes on.

None of these factors change should prices fall unless you are unfortunate enough to be caught in the negative equity trap where the value of the property is less than the outstanding loan taken out to make the purchase. This is a distressing situation that can lead to forfeitures but, fortunately in Hong Kong, this is rare compared to other jurisdictions.

On the other hand a sense of jubilation arises among property owners when prices rise. They gleefully regale each other about how much they have “made” thanks to a rising market. This, of course, is pure nonsense because no money is “made” until a transaction takes place. But if it makes folks feel good, don’t knock it.

The trouble is that this kind of property euphoria also tends to be the mother of bad decisions. Flushed with the success of their property investment people who should know better start taking out loans to buy more property, maybe they even look overseas where the prices are lower.

There is no shortage of choice but strangely these new born international property investors seem quite unfazed by their ignorance of places that appear to have hot property markets. Suddenly you hear them talking about, say, Sri Lanka, or Croatia or maybe even Vietnam. You sure get more for your buck in these places but there is usually a reason for this and in the more exotic locations that reason often has a lot do with risk.

There are also problems in established overseas markets of the kind that are heavily promoted in Hong Kong. Local buyers are offered a glittering array of new projects, especially in the British property market, which is the subject of many promotions. Few buyers seem to question why the marketing is so heavy here. Could it be that demand in Britain for these properties is low? Could it be that they don’t realise that capital appreciation of new projects significantly lags behind the rest of the market? And why don’t they know that the British residential market tends to have a lower yield and poorer capital appreciation than other property markets, notably those for commercial property.

In other words it is hard to see logic playing a sufficiently big role here. There is far too much sentiment and fuzzy thinking tied up in the residential property market. However it begins and ends with the smaller buyers; the big players are far more pragmatic and gamble on the illogicality of the smaller players to make their profit.

Meanwhile as prices fall in Hong Kong chances emerge for more people to clamber on the property ladder. It makes a lot of sense to do so for those who are still renting, not just in fiscal terms but also in terms of the security and comfort derived from owning a home of your own.

Price falls are also good for the commercial sector; those of us who spend our time dealing with rapacious commercial landlords have absolutely nothing to fear from price falls. On the contrary we look forward to the boot being on the other foot.

So, why are there so many stories using words such as “worrying” and “concern” when describing falling prices in the property market? A more appropriate word, in my view, is opportunity, opportunity to buy at lower prices and an opportunity to lower costs. None of this strikes me as a matter for concern.