On the up: house prices continue to rise despite concerns about an overheated market

In property cycles, what comes down must surely go up – eventually. It’s been 20 years since the last big property crash happened in 1997, as a consequence of the Asian financial crisis. The Hong Kong housing market saw 70 per cent of real estate assets values wiped out, plunging tens of thousands of homeowners into negative equity.

Is it overly optimistic to think that this couldn’t happen again, now that prices have surpassed the 1997 peak? Some analysts, who have followed the property cycles throughout these two decades, offer their views.

In 1990, Buggle Lau Ka-fai was just beginning his property research career, so he saw first-hand the bull run that led to the 1997 crash.

“There was a lot of speculation, despite government-imposed cooling measures,” recalls Lau, who is chief analyst at Midland Realty. With only 10 per cent deposit required for property purchases at the time, and prices bound to rise before the balance was due on completion, buyers would “flip” units for a profit before they had to settle. “And they weren’t just buying one unit, but five, or 10, at a time,” Lau says.

The government’s target of 85,000 new units per year meant that supply was plentiful – effectively feeding the buying frenzy.

When the bubble finally burst it was caused by external factors, to which Hong Kong has always been susceptible. Nevertheless, the value wiped off their property meant that buyers either couldn’t settle, or their banks called in the loans. Truckloads of units were then dumped on the market, followed by bankruptcies and high unemployment. “It was a disaster,” Lau says.

The now 25-year real estate veteran does see some similarities to today, notably in the high prices. However, there are important differences.

Nowadays, down payments are more in the order of 40 or 50 per cent. Transaction volumes have dropped by half, particularly in the secondary market – a reflection that “flipping” is no longer commonplace.

Today’s cooling measures are more effective, Lau points out, highlighting one – the seller’s stamp duty – which has curbed speculation by removing the opportunity for short-term gain.

Another similarity Lau still sees today is Hongkongers’ desire to own property – hence the queues for new launches. But banks today share client information, preventing people from shopping around for multiple housing loans from different providers, he adds.

Homes are also comparatively more affordable. In 1997, a mortgage ate up 80 to 90 per cent of a household’s income – today that’s down to 40 to 50 per cent. And interest rates are much lower, and unlikely to rise dramatically. Supply has also softened, so all pillars of the market are now more on an even keel, in Lau’s view.

“Barring any external shocks which we cannot foresee, we expect the market to remain stable with prices slightly increasing in the second half of 2017,” Lau says.

Having also lived through two-plus decades of real estate cycles in Hong Kong, Simon Smith, head of Asia-Pacific research at Savills, sees that “some areas of the residential dashboard are flashing red”. These include inflation adjusted property prices, which Smith says are 50 per cent above 1997 levels, and the price-to-household income ratio, which “overtook 1997 levels in 2010”. “This is one indicator that household affordability is stretched, and at a time when real interest rates are turning positive,” he says. “Arguably, we are also harking back to the ’90s, when regional economies gorged on debt,” Smith continues.

On the plus side, he points to tighter housing supply, with 11,000 units now released annually, compared to an average of 30,000 per annum in the 10 years to 1997, and the various government interventions to curb speculation.

Smith is “not alarmed” about a possible repeat of 1997. “I think it’s more likely that we’ll see a gentle rebalancing [of the market],” he says.

Joshua Miller, CEO of property agency OKAY.com, was an investment banker with Morgan Stanley in Hong Kong at the time of the crash. “I remember it vividly,” says Miller, who moved into real estate in 2006.

He sees in Hong Kong today “very different conditions” to the exogenous factors, sparked by the Thai currency collapse, which led to the 1997 “black swan event”.

“We haven’t had the kind of frenzied buying that typically leads up to a crash,” Miller says, citing “normalised activity” of 5,000 to 7,000 transactions per month in 2017, in line with the long term average over the past 10 years.

Lending is growing at a healthier – read, slower – rate, and loan-to-value debt levels are now hovering around 50 per cent, compared to over 60 per cent two decades earlier and 70 to 80 per cent in other global markets. More importantly, Miller says, interest rates are “nothing like the 9+ per cent in 1997”. The rising interest rate environment we’re experiencing now “is a sign of growth, not a bubble”, he adds. “Only once rates reach high levels do property prices become negatively impacted.”

Miller also points to pent-up demand resulting from the numerous cooling measures in recent years. “People have not been buying [in great numbers] – they have been waiting to buy,” he says. Hongkongers are big savers and enjoy low tax rates, so home affordability should take into account wealth, not just monthly income, Miller adds.