Hong Kong real estate: start buying if prices drop 50 per cent

In the past few weeks there has been talk of imminent real estate price drops for Hong Kong, with guesses ranging from a few per cent to 50 per cent. This might sound like a lot but if you were to dig deeper into the price index series, a 50 per cent drop would just put us back to around 2009 - right at the start of the US quantitative easing (QE) monetary policy.

This author does do not have a crystal ball and in these days of bigger-than-life central bankers, some of the old school, traditional/technical/fundamental analytical methods might not even work too well.

Nonetheless, there is no stopping one from imagining what it would be like if Hong Kong real estate prices did drop by 50 per cent.

What would a 50 per cent drop in property prices do to the economy?

1) Things will become cheaper, real estate included of course. If previously you could buy two properties, now you could acquire four with the same budget, or two with half the budget. Not only that, most commodities and services could be bought for less. Instead of paying HK$31 for a breakfast, you might even get it for HK$13!

2) Rents would also drop. However, based on the 1997 to 2003 experience, rents overall might drop at a slower pace than prices, i.e. it is likely the rental yield would improve. This in turn means there is a chance that the (nominally) lower rents actually carry higher purchasing power.

Barring unexpected circumstances, this author would be enticed to start investing when and if prices do drop 50 per cent, especially for competitive locations. There are hurdles though.

a) Buyers need staying power to hold their property as it is unlikely such a debacle would be over within months - more like years, say three to five. So one must have sufficient staying power after purchase.

b) You need the guts to buy because when prices drop that much and things are bad all around, well meaning relatives and friends would discourage you from entering the market. News, as usual, tends to project a straight line down - and up in good times. You need strong conviction, perseverance and patience to overcome all such well-intended advice.

How likely is a 50 per cent price drop?

QE appears to be losing its lustre in the sense that its punch seems to be growing weaker; more resources are required to produce the same punch. Furthermore, there seems to be little or no coordination among nations on QE. For example, the European Union has just started QE and is still having arguments about it; Japan is doing it kamikaze-style; the US is contemplating the opposite; and China wants to cut back but can't. Also, maths-wise, say you print HK$100 to buy a certain item previously costing HK$50. Presto, you get a 100 per cent price gain! But the economy is still a deadbeat, so print HK$200 to buy the HK$100 item, another 100 per cent gain! And on and on. Naturally this is a very simplified picture of things, but you get the idea.

Second, developed economies are licking their wounds, and developing economies are not doing too great either, and that includes China. So this begs the question: who else can be "$uperman"?

Third, populations are ageing worldwide, which tends to induce deflation rather than inflation.

Also, despite all the above, when one can still see new homebuyers becoming excitable and joyous upon being able to purchase a unit from the developer, one can expect to see the opposite sentiment when the tide turns.

Stephen Chung is managing director of Zeppelin Real Estate Analysis and an honorary adjunct professor of the University of Hong Kong