26 May 2014 – Relative to some analysts that have been predicting 20-30% declines in the Hong Kong property market, I've been much less pessimistic in my view on the markets. Over the last year, I’ve told clients that while I do believe a downward correction is coming, the decline will be more modest - around 10-15% in the next 1-3 years. There are 3 main reasons why I believe this:
1. Pent-up Demand
There is an enormous amount of pent-up demand for property investments in Hong Kong. People looking to purchase their homes or invest have been sitting on the sidelines for the last 2 years (as transaction volumes show), waiting for some downward movement in pricing expectations by sellers (which is now starting to materialize.) In addition, incomes in Hong Kong have been increasing. For both these reasons the money sitting on the sidelines has been growing, awaiting any sign of a market correction.
2. China’s slowdown
China's slowing economy has been highlighted by many analysts as another factor that will lead to a market decline. However, it also makes Hong Kong properties more attractive investments on a relative basis for mainland Chinese. So there is some offsetting effect to a China slowdown.
3. Interest Rates
While it’s true that high interest rates make borrowing more expensive and prohibit real estate investments and mortgages, a mildly increasing interest rate environment often stimulates the real estate market.
In a low interest rate environment (such as we have now), modest increases are driven by a recovering economy, and signal optimism about economic recovery/growth. This is what we're currently facing. This optimism stimulates real estate markets - the rebound seen over the last 18 months in the U.S. is a perfect example.
People are also more keen to borrow while interest rates are still low relative to historical levels, and rates are only going to get higher the longer they wait. It will be a long time before we reach the 10%+ interest rate levels that historically have hurt property markets.
Other Factors
In the current environment, these are perhaps the most important factors driving property prices. Of course, there are many others.
To name a few examples, there is a lot of new supply coming onto the market – approximately 17,000 units in 2014 alone (the most in 10 years), which would bring prices lower. On the flip side, income levels have been rising, increasing affordability.
The government may be softening its stance on stamp duties, which will increase optimism and purchasers’ wiliness to invest. But it also has made it clear that it will not be reversing the cooling measures in a meaningful way (at least anytime soon.) And the cooling measures have led (or forced) some people to rent instead of buy their property, bolstering the rental market (and hence investment yields).
The global downturn led some multinationals to cut expansion plans, reducing the number of expatriates moving to Hong Kong. However it also increased global focus on the China consumer as the path to success (or survival), leading some companies to increase their Asia expansion plans while cutting headcount elsewhere.
As you can see, it’s complicated. Quantifying exactly which effect is more important than another is next to impossible. In addition, the relative impact of each factor depends on the overall environment we’re in, and often one effect may lead to another counter-effect (as seen in the global downturn and increased focus on China mentioned above). And it’s all too easy to focus on the immediate effect and not consider what knock-on effects it may have that drive property prices in the opposite direction.
Summary
Nobody is smart enough to accurately predict the future, particularly in the longer term and in the complex world we live in. I’ve had views that contradicted some property specialists, and as they say, if you maintain your view for long enough, eventually you’ll be right.
But I do believe that some analysts tend to overreact and focus on the immediate potential impact of changes in the market, not the bigger forces and counter-forces that drive the long term outlook. And in real estate, where decisions have a major impact on someone’s financial position (unlike buying a toaster), they take longer and markets move more gradually (with “black swan” exceptions such as SARS).
So focus first on your personal financial situation and investment timeline to avoid unwise risk. Find many opinions, and remember that the longer-term dynamics – both historically (what got us “here”, and what does “here” mean) and future trends – should always be considered.
