Hong Kong Residential: Another 20% Up and Pop?

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

August 2010

Notwithstanding all the recent sale and transaction measures to regulate the market, most experts believe these will do little to alter the current market price trend which is up. And as long as liquidity is abundant, evidenced by the still historically low rates, doing away with confirmor deals, lowering the leverage to 60%, and the like are barking up the wrong tree.

Nonetheless, your humble author thinks:

A)    The Hong Kong private residential real estate market is getting more dangerous

That is, risky but dangerous sounds more appropriate, urgent, and threatening. Also, dynamites, being explosives which make things ‘pop’, are usually marked ‘danger’. I have not seen boxes of fire-crackers, let alone dynamites, marked ‘risk’. 

B)    The return to risk ratio is getting less and less appealing, probably approaching no higher than 1 to 1

That is, for every dollar profit expected to be gained, there is a corresponding chance to lose one dollar. One can easily obtain more or less a 1 to 1 ratio by going to the casinos in neighboring Macau e.g. playing the red-black colors on roulette. There is no need to hire real estate agents, spend time inspecting and negotiating, and endure all the fuss attached to property buying.

C)    IF the typical market price goes up another 20%, the chance of popping will become immense

Why? Because the current market situation is like 1996 AND 1997! Here are the elaborations [data sources include government websites and departments such as the Ratings and Valuation Department-R&V]:

1)    GDP per capita = our analyses on various occasions suggest that the GDP per capita, which reflects liquidity, earning power, economic performance etc, tends to show a strong and consistent correlation with residential prices. Other factors such as supply, demand, interest rates and so on, tend to pale compared to GDP / capita and are even at times NOT factors at all. People think they are owing to intuitive illusions ingrained in our brains.

2)    Method = we compare the long term relation between GDP / capita and typical private residential prices and use this as a benchmark for the current observation.

3)    Like 1996 = we index the nominal GDP / capita and typical residential price from 1980 to now and find the average of the former is 5.16 and that of the latter is 4.03, i.e. a long term gap of 1.13 [refer to the gap between the two consistent lines straight across the first chart below].

Looking closely, one finds a) the GDP / capita index is usually above the residential price index except in 1997 when the market peaked; b) the current gap between the two is 0.55, which is similar to the 0.50 seen in 1996, and this means the ‘purchasing power’ is ‘lower than usual’.

If not for the fact that mortgage rates being at one of the, if not the, historical lows, your humble author wonders if the affordability measures could still suggest homes to be affordable. That is to say, the rise in residential prices has been offset, or masked, by lower rates.   

4)    Also like 1997 = we have also investigated how the picture would look like if we were to start after 2003, the SARS year and we also compare this to the eight years prior to 1997 [refer to the second chart below].

Interesting, the residential price indexes in both periods are higher than the GDP / capita indexes, just the opposite of the 30-year long term trend seen above. This may have to do with the residential price indexes starting at low points, especially for the 2003 to 2011 period.

Also, in a very coincidental way, the 2010 residential index is 1.88 times the GDP / capita index, which is almost the same for the 1997 residential to GDP / capita index ratio. However, 1997 is the 9^th and last year in the period while 2010 is only the 8^th and second last within the period.

Thus, IF we were to assume the 2010 trend to extend into 2011, the residential index would have gone up close to 20% while the GDP / capita would have stayed nearly flat. The ratio between them would have become 2.19 which is higher than that in 1997.

By no means is this a prediction, a projection, or even an estimate, we are just curious to find out what it is like should the market march further up.

And the picture suggests a dynamitic danger and perhaps a pop too. 

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.    

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