Is this the right time to buy a home in Hong Kong? Bargain hard instead of waiting for further correction
- JLL’s Cliff Tse says look to satisfy three conditions – timing, location, holding power
- You should own your home for a long time, so ability to cover mortgage is paramount
Is now a good time to buy an apartment? Many people have asked this question, and as we step into 2019, this is a good time to reflect on it.
The property market in 2018 was a roller-coaster – due to an encouraging sales response to new projects, the first half was fuelled with positive sentiment. As a result, the mass residential index surged by 9.8 per cent in the first eight months. However, when it encountered market uncertainties, market sentiment turned sour momentarily, and the whole-year price growth narrowed to 5 per cent only.
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Experts always say property is about location, location, location. But if I were to buy an apartment to live in, I would look to satisfy these three conditions instead – timing, location, holding power.
Having observed the ups and downs in the past two decades, it is still not easy to predict how the market will go. According to the JLL research department, the mass residential price index has gone up by 198 per cent so far, from a trough in 2009 until now. And it is widely expected that property prices will drop further, from a peak in August 2018, before they bottom out.
Shall we wait? If I were able to locate an apartment that matched my preference and budget, instead of waiting, I would rather bargain for a deeper discount to absorb this expected adjustment.
The choice of location depends on each buyer’s pursuit, such as ease of access to the workplace, tranquillity, neighbourhood, etc. And since Hong Kong’s transport infrastructure has improved a lot, some traditionally remote locations have become accessible by the MTR or public transport. However, we should be alert about areas where high volumes of supply will become available in the coming years. Developers’ pricing strategies for new projects will more or less impact the prices of secondary apartments nearby, although developers always say they refer to these prices when they set their price lists.
For instance, at the recently launched Kwun Tong residential project, a low-price strategy helped to stimulate the market. However, transactions for nearby secondary homes nearly halted.
I would extend the location factor to the type of building as well. Sometimes, the price performance of different types of units will be quite varied. Some people have commented on the usefulness and price performance of “nano flats”, generally defined as units measuring less than 200 sq ft. This is possibly a by-product of high property prices, low lending ratios and the tactic of maximising unit selling prices by developers.
My view is that nano flats located close to office hubs might be a solution for singletons who need to live near their workplaces. However, the prices of such units in remote locations might be subject to a more severe correction if prices drop in general.
Many homebuyers need a mortgage. The higher the lending ratio, the easier it is for new homebuyers to enter the housing market. To dampen demand for property, however, the Hong Kong Monetary Authority has instituted a stringent lending ratio of as low as 50 per cent of the purchase price or the valuation, whichever is lower. That is to say, most current homebuyers have high equity in their properties.
Quantitative easing has since 2009 sent interest rates to very low levels. The lowest mortgage rates were as low as 1 per cent a few years ago, but the latest is around 2 per cent – still very low. With relatively low gearing, banks’ 3 per cent-plus stress tests on borrowers’ repayment ability and the high transparency of borrowers’ credibility among banks, holding powers of most owners are definitely stronger than those in the last peak, in 1997. It is particularly true of the secondary housing market.
In the primary market, to alleviate some buyers’ down payment burden, a number of developers help them arrange second mortgages with financial institutions on top of a bank’s primary mortgage.
Normally, the interest rate on the second mortgage is low during the first three years, but it will go higher once this “comfortable” period expires. Ideally, these buyers can refinance both mortgages thereafter, assuming prices go up.
If the prices stand still, or adjust downwards, these buyers might not be able to refinance and need to pay high mortgage rates. Anyway, the number of buyers opting for a second mortgage is not significant.
2018, Hong Kong’s second-best year for property sales at US$93 billion, ended with a whimper in December
I always advise my friends that they should own their residences for a long time. Out of my criteria of timing, location, holding power, the ability to repay your mortgage is certainly a priority. The right timing and good location on their own cannot guarantee one’s ownership of a home.
Cliff Tse is senior director of valuation advisory service department at JLL