Is Hong Kong’s residential or commercial property bubble lastly prepared to break? Here are 2 things to view
Stein’s Law, named after Herbert Stein, primary economic consultant to disgraced United States president Richard Nixon, specifies that “if something can not go on permanently, it will stop”.
Well, the nine-year run-up in Hong Kong real estate costs can not go on forever. One day it need to stop. And after that house rates in the city will fall– a lot.The difficulty is working out when that day will come. The upward track in Hong Kong residential or commercial property costs because the monetary crisis has actually been freely dotted with gravestones of the track records of experts who called completion of the fantastic booming market too early.As long earlier as December 2009, hardly 9 months after the depths of the crisis, the International Monetary Fund was alerting about the risks of a hazardous bubble in the Hong Kong home market.And, ever since, prices have actually continued to rise. Recently the Centa-City leading index of secondary market value hit a brand-new high, totally 124 per cent above its level when the IMF first provided its bubble alert back in 2009.
Naturally, that might mean the danger of a property bust is more instant than ever. After all, every day seems to bring newspaper article about how overinflated the local property market has actually become. High-end flats sell for HK$ 130,000 (US$ 16,640) per square foot. Developers deal “nano flats” scarcely bigger than a cars and truck parking space. And parking spaces themselves switch hands for more than HK$ 5 million each, with property experts arguing– obviously seriously– that they are a great financial investment at the price.There is, without
doubt, a strong whiff of late cycle insaneness about everything. Yet the experience of recent years teaches that relatively overextended cycles can last a lot longer than anyone initially thought possible. So how much risk exists truly of an imminent crash in Hong Kong’s home market?To answer that question it is needed to look at the two forces which above all have actually been credited with driving the city’s housing rates higher: the increase of cashed-up buyers from mainland China, and the excess of liquidity in Hong Kong’s financial system that has actually kept local home mortgage rates at rock-bottom levels.First: the legendary mainlanders. They were blamed for pushing rates higher. It was feared their absence, as the mainland authorities broke down on capital outflows, would speed up a collapse. Today, the Centaline Home Agency approximates they represent about 10 per cent of purchases by number, and 15 percent by value. That’s below the peak of 2011, but approximately double the percentages seen at the low point of their purchasing a few years earlier. In short, there is no sign that mainland purchasing is drying up. Second, the huge one: home loan rates. Since the monetary crisis, Hong Kong’s financial system has been awash with liquidity. With the huge bulk of new home loans linked to regional interbank rates of interest, that liquidity has actually kept regional home loan rates down even as
US dollar rates have risen.As just recently as six months ago it was possible for Hong Kong purchasers to get mortgage at rate of interest as low as 1.75 percent. Over the previous couple of months, nevertheless, regional interbank rates have actually begun to creep higher, in part since the Hong Kong Monetary Authority has actually looked for to drain liquidity from the market. As an outcome, regional rate of interest have actually narrowed the space with US rates, as United States rates themselves are pressing greater. Today, that exact same home loan would come with a rate of interest of 2.12 per cent.If the gap between Hong Kong and US rate of interest closes entirely– as it should eventually– and if the United States raises rates of interest by 0.75 portion points over the next 12 months as the monetary markets expect, then the rate of interest on floating rate Hong Kong home mortgages will climb up to 3.4 percent, practically doubling in simply 18 months.How much would that matter? A doubling of home loan rates certainly sounds painful. But for one of the most part Hong Kong property buyers are a fairly mindful bunch. Stories are plentiful of property speculators leveraged to the hilt and beyond, the HKMA’s figures reveal that the average borrowers take out a home mortgage for just half their property’s purchase rate, with less than 5 per cent getting top-up loans from designers. So, let’s imagine Hong Kong’s average homebuyers: a couple with one child who have actually secured a 25-year HK$ 4 million home mortgage to purchase an HK$ 8 million flat (with much of the deposit financed on easy terms by family members).
6 months ago they were paying roughly HK$ 16,500 a month in home mortgage expenses, including principal repayments. Today they are paying HK$ 17,200. In a year’s time, they might well be paying HK$ 19,800.
That’s a steep boost. It is not likely to prove ruinous. According to the Census and Statistics Department of the Hong Kong government, the mean monthly income for an “economically active” household living in personal sector real estate is HK$ 42,200.
In other words, our couple’s home mortgage costs will have increased from 40 percent of their month-to-month income to 47 per cent. Clearly some belt-tightening will be needed. But the squeeze will be nowhere near as severe as the one which helped precipitate the housing crash of 1997, when with local prime financing rates at 10 per cent, mortgage service costs consumed two-thirds of earnings for moderately leveraged house owners, and more than 100 per cent for a great many families.
In short, with mainlanders continuing to purchase, and with rising local interest rates not rather the instant danger that many observers fear, in the absence of a global economic shock Hong Kong residential or commercial property prices could quickly continue to push even greater in the near term.The city’s house rates are still eye-wateringly pricey naturally. And there is no doubt that the present run-up can not go on permanently, which implies– according to Stein’s Law– that it should stop one day. It’s simply that the inevitable day of reckoning may still be even more off than lots of people anticipate. ■ Tom Holland is a former SCMP staffer who has
been composing about Asian affairs for more than Twenty Years