Hong Kong property will trend higher...until it doesn’t

Property prices are going up.

It struck me the other day how hard it must be to live in a subdivided flat with no windows – illegal, but often not enforced by the Buildings Department. And bad luck if you are a young Hongkonger whose glittering school, university and career is blighted because you can’t get married without your own home.

Hong Kong residential property is the least affordable. In the world. Average flat prices, measured by Demographia, are over 19 times median income at the highest measure in 11 years. The price for a starter property on Hong Kong Island is today HK$6 million. You need a cash deposit of 60 per cent and a salary to pay a big mortgage. A good young professional’s salary doesn’t go far in battling the food, transport, distribution and utility cartels in the second most costly city in the world – and that’s before housing (Economist Intelligence Unit). The retail property index is up 123 per cent since the trough of 2009.

And still property prices go up. Over the weekend, 1,000 apartments were offered, attracting 23 potential buyers for every single unit. One family bought nine flats for a cool price tag of HK$200 million. In Communist China, lots of people have lots of money, and if you are wealthy on the mainland, Hong Kong property is a trophy.

Hong Kong is an extremely attractive place to live if you can get permanent resident status. We have good health services, transport and communications unslowed by someone cyber-snooping on you. As long as you are not an intemperate bookseller, you can say what you like. The rule of law means you can sue the government and win. We have just jailed our former chief executive for a misuse of office that would not raise an eyebrow in most developing countries. We have tax levels low enough to cause hyperventilation in most parts of the world, while running a large budget surplus and holding monstrous capital levels that make eyes water.

That would be fine if property were an investment but to nearly all of us, it is a home. It is not a luxury but a necessity. Not a want but a need.

The government has enacted measures to curb property prices by raising taxes, by penalising trading, and by taxing non-residents. But if you have HK$200 million to spend, you don’t mind paying a bit more. There is insatiable demand from a country of 1.3 billion people. It is the hegemony of numbers. Hong Kong is no longer a bastion of the free market – the property market represents the unacceptable face of capitalism. These price-cooling measures may have worked in Singapore and China but in Hong Kong it is akin to burping against thunder

Government now has to make plans to bring homes back to the property market. The new chief executive has enormous powers and resources to do so. Yet to change the playing field half way through smacks of Communism. The losers – powerful interests will wail and hold onions to their eyes as their Cayman Island companies fill with money. But the winners will be the people of Hong Kong.

These measures will require leadership, boldness and bravery to stand up and fight the right battles. There must be no withering in the face of confrontation. Can we expect any of that from an ex-civil servant? It will require a dramatic change of character.

Hong Kong property firms remain upbeat on market outlook

It is because we have so little faith in the next chief executive to drive change that investors should expect the Hong Kong property market to continue to trend. Fiscal measures have failed, legal measures are too confrontational, and rising interest rates will also fail to curb the excesses. It is not a rational market; there are no valuation measures that work anymore. There is simply too much buying pressure. More buyers than sellers.

There is only thing that will make the Hong Kong market affordable – and that is a global crash. No one will stop the party from inside. When the crash does come, our property prices will fall ruinously, having risen more than most as highly indebted owners dump their flats onto the market. Prices are made on the margin and these are the marginal investors.

It is indeed a paradox that when the crash comes, the fat cats may well be down to their last billion – but the homeowner stuck in negative equity will have to work for his home for the rest of his life.

Richard Harris is a veteran investment manager, banker, writer, broadcaster and financial expert witness