"Hong Kong House Prices Could Soar Another 10% Next Year" - Have They Just Rung The Bell?

Hong Kong property was in Algebris Investments’ top tier of six most inflated bubbles from its longer list of the world’s fourteen biggest bubbles. The territory is ranked as the most expensive housing market in the world for the seventh successive year in 2017, with the medium home price selling for 18.1 times the median household income, according to Forbes. Last week, we discussed how the record price per square foot for a Hong Kong residence was smashed twice on the same day by the same buyer. The buyer paid HK$600 million, or HK$131,000 per square foot for an apartment in the exclusive “The Peak” district. Later that day, the same buyer paid HK$560m for another apartment measuring 4,242 square feet, equivalent to HK$132,000 per square foot. These two purchases beat the previous record of HK$105,000 per square foot paid on 17 September 2017.

In his analysis, Algebris portfolio manager, Alberto Gallo, used a variety of measures to identify irrational behaviour, two of which are “The trend is your friend” and “Sky is the limit”, both which apply to the latest prognostications for Hong Kong property prices from three of its leading real estate agents. According to Bloomberg.

Hong Kong’s red-hot housing market shows no signs of cooling anytime soon. Prices in the city have climbed 11 percent this year, defying skeptics waiting for the bubble to burst and government attempts to rein in the world’s most expensive housing market through a raft of taxes and mortgage curbs.

If anything, the frenzy has intensified in recent months as investors have poured money into property. Buyers have set new records for everything from luxury homes in the exclusive Peak neighborhood to undeveloped residential land. There have also been blockbuster deals for commercial property in the heart of Hong Kong’s central district. “Now it is very hot, because of the hot money rushing in,” said Raymond Ho, deputy senior director of residential development and investment at Savills Plc. “There is more record-breaking coming.”

Runaway growth has put the city in bubble risk territory, according to the UBS Global Real Estate Bubble Index. Even so, mass-market home prices will rise 8 percent to 10 percent next year, according to property consultancy Colliers International Group Inc. Real estate consultant Knight Frank LLP expects prices of such homes to climb 5 percent next year, while luxury housing advances 8 percent.

Helpfully, Bloomberg has conducted a survey of Hong Kong property bulls to discover their reasoning as to why the “Sky is the limit” for prices.

Here are five reasons why property bulls say the city’s housing market will continue to defy expectations of a slowdown:

1. Demand Outstrips Supply
An average 20,000 new private residential units come to market each year, barely enough to cover the 20,000 mainland Chinese who become permanent residents each year -- allowing them to avoid the punitive stamp duties slapped on foreign buyers -- let alone anyone else. The number of unsold apartments in the third quarter fell to the lowest levels since 2015, according to Bloomberg Intelligence.

2. Money’s Easy
Cash-rich developers are pulling out all stops to entice buyers. At its Cullinan West project, Sun Hung Kai Properties Ltd. is offering buyers finance of as much as 120 percent of the purchase price: 90 percent toward buying the new property, and 30 percent to pay down their existing mortgage. More than 95 percent of the 321 units offered over the weekend sold, Sun Hung Kai said. They were priced about 11 percent higher than a March sale at the same development, according to BOCOM International Holdings Co. Other developers offer rebates to buy furniture or interest-only loans for the first three years.

3. ... and Cheap
In a sign that mortgage wars between banks are raging even amid the prospect of rising interest rates, HSBC Holdings Plc is offering to match low rates from rival lenders. Hong Kong’s largest mortgage lender is offering some clients a rate of Hibor plus 1.28 percent if they get similar terms from other banks. That works out to less than 2 percent.

“These rates are highly affordable and will continue to be, even if the U.S. pushes up rates 25 or 50 basis points,” said Marcos Chan, senior director of head of research for Hong Kong, Southern China and Taiwan at CBRE Inc.

 

4. The Bank of Mom and Dad
The biggest obstacle for new home buyers is coming up with the minimum 40 percent down-payment required by Hong Kong Monetary Authority loan-to-value ratios. Step in the Bank of Mom and Dad. Hong Kong’s de-facto central bank has warned young buyers are increasingly turning to their parents, with home purchases being financed partially by proceeds from refinancing mortgages. That also makes it harder for others whose families aren’t asset-rich to get on the property ladder.

The average number of monthly refinancings rose to 3,100 in the first three quarters of this year from 2,200 in 2016, according to HKMA data.

Through August, the value of refinancing was equal to almost 50 percent of primary sales, according to Cusson Leung, head of research for Hong Kong property and conglomerates at JPMorgan Chase & Co. “We have the sense that most of the financing is going into buying property.”

5. Soaring Land Prices
Aggressive bids by mainland developers keen to build up land banks have pushed Hong Kong prices to records. Non-local developers account for 68 percent of all government land purchases this year, according to Colliers.

In February, two mainland companies paid a record HK$22,118 per square foot for a waterfront site. Those costs will ultimately result in higher apartment prices once developments are completed, causing neighboring property owners to raise their own expectations.

“People translate a land sale into the final built price, and when it is way above the market everyone will raise their own prices,” said Denis Ma, head of Hong Kong research at consultancy Jones Lang LaSalle Inc.

We don’t know when the HK property bubble will burst, but the cascading selling we’ve seen in Chinese financial markets – from government bonds to corporate bonds to equities following October’s Party Congress – is hardly reassuring. Furthermore, as was noted above, Hong Kong mortgages tend to be priced off Hong Kong interbank rates and 1-month HKD Hibor has recently spiked to its highest rate since December 2008, in the midst of the last crisis, which hardly augurs well.

 

Hong Kong Property: Record Price Per Square Foot Smashed...Twice...By The Same Buyer

Two weeks ago, we discussed Algebris Investments’ analysis of the world’s biggest asset bubbles. Portfolio manager, Alberto Gallo, noted that “It’s not just about valuation, it’s about irrational behaviour” and used variety of measures to identify the latter including ”Sky is the limit”, “Bidding wars” and “The trend is your friend”. Gallo listed what in his opinion were the fourteen biggest bubbles across the globe which included Hong Kong property, obviously.

In the global league table, Hong Kong held on to the dubious accolade of being the world’s most expensive place to live for the seventh year in succession in 2017, as Forbes noted, quoting work by Oxford Economics.

Holding on to its rank as the most expensive housing market in the world for the seventh year in a row is Hong Kong.

 

The median home price was 18.1 times the median annual pretax household income last year, according to a recent annual report from Demographia. Though a small improvement from the year before when home prices were 19 median household income, Hong Kong still ranks as "severely unaffordable" the report said.

 

The city"s housing prices have skyrocketed in recent years, driven by low interest rates and mainland Chinese buyers. Lack of affordable housing has become a top social issue as the city"s poor crowd into "cage homes" and dangerous, subdivided apartments.

To cement its leadership position in the realm of obscene property valuation, the South China Morning Post (SCMP) notes that the record price per square foot for a residence in Hong Kong has just been smashed…twice…by the same buyer…for two apartments in exclusive “The Peak” district. 

Mount Nicholson, the luxury housing development atop Hong Kong’s highest elevation, has clinched the crown as the priciest address in the most expensive residential market on earth, selling two apartment units for HK$1.16 billion (US$149 million) to a single buyer.

A buyer paid HK$600 million, or HK$131,000 per square foot, for a property measuring 4,579 square feet at Mount Nicholson, according to Wheelock Properties, which oversees sales of the joint project between Wheelock & Co. and Nan Fung Development, without divulging the buyer’s identity.

The same buyer splurged another HK$560 million on the same day on a second flat measuring 4,242 sq ft, or about HK$132,000 per sq ft. In square footage terms, the second property is the most expensive residence in Asia.

“From the perspective of an ordinary Hong Kong resident, we’ll never understand why” the city’s wealthiest people pay such sums for homes, said Knight Frank’s head of valuation and consultancy Thomas Lam.

As the SCMP laments, Hong Kong’s new Chief Executive is facing a losing battle in providing affordable housing and containing the bubble.

The prices of Hong Kong’s private housing advanced in September for the 18th consecutive month to a record, underscoring the challenges facing Chief Executive Carrie Lam Cheng Yuet-ngor, as she puts housing front and centre as the most important policy priority in her four-month-old administration. In her maiden policy address to the city, she pledged to create a “Starter Home” scheme to increase home ownership in the city for first-time buyers.

The transactions at Mount Nicholson, comprising 19 detached houses and 48 flats over three phases, broke the city’s previous price record, when a buyer paid HK$105,000 per sq ft for a HK$522 million duplex penthouse at Henderson Land Development’s 39 Conduit Road project at the Mid-Levels.

Hong Kong’s private home prices have increased by 430 per cent since 2003, making it the world’s most expensive urban centre among 406 cities to buy a home in, according to the Demographia International Housing Affordability Survey.

For the time being, Carrie Lam’s plan has about as much chance as that of King Canute.
 

Demand For Hong Kong Micro Apartments Surges As Buyers "Downgrade Expectations"

The surge in Hong Kong housing costs has lifted home prices well beyond the bounds of affordability for most local families and young professionals, leading to long lines at housing sales that were sometimes oversubscribed by as much as 15x. But while home prices have risen for every type of home, Bloomberg notes that the intensifying demand for micro-apartments - some of which are as small as 128 square feet (about the size of a garden shed) - has caused prices for this segment of the housing market to climb more quickly than normal-sized homes. Why? Because they’re practically all Chinese buyers can afford.

“The pool of buyers for small flats is getting bigger and bigger because people have to downgrade their expectations of the size of flats they can live in,” said Nicole Wong, regional head of property research at CLSA Ltd. in Hong Kong.

One 161 square foot micro apartment sold by property giant Henderson Land Development Co. was bought for just under $500,000. For that amount, buyers would be better off sleeping in their cars. Specifically, a Tesla Model X, which, as Bloomberg notes, is about 160 square feet, the same size of the above-mentioned apartment. Bizarrely, this is one instance where a Tesla Model X might be considered a bargain: They start at $150,000 in Hong Kong.

Indeed, the intensifying demand for smaller apartments has caused their prices to rise much more quickly than those of larger homes. The average micro apartment price has increased by 99% between 2010 – when they comprised just 5 percent of the Hong Kong market – and 2016 – when they jumped to 27 percent of the total. According to government figures, micro apartments are forecast to comprise 43 percent of new housing stock next year.

Here’s Bloomberg:

“The higher cost of smaller units is demonstrated by the square footage price: At a Kowloon City development, a 181 square foot apartment on a high floor sold in May for HK$25,897 ($3,321) a square foot, or HK$4.69 million. A larger apartment that’s similarly positioned sold two days later for HK$23,047 a square foot — a HK$2,183 difference.

The trend reflects the unintended consequences of government policies meant to cool the property market, which are instead driving demand for the smallest apartments. Developers, looking to help the government achieve supply targets while aiming to lower the buyer’s price threshold, need to recover the record prices they’re spending at land auctions — so they’re squeezing more units into a single plot of land.

Even Hong Kong"s actual parking spaces cost more than homes in much of the developed world. One in a prime building of Hong Kong sold for the equivalent of $664,300 in April, local newspaper Ming Pao reported this week.

Incoming Chief Executive Carrie Lam, who takes over on July 1, the 20th anniversary of Hong Kong’s return to Chinese rule, has promised to increase the home ownership rate by providing government help for people too wealthy for public housing and too poor to afford an apartment of their own.”

The state of Hong Kong’s housing market has changed dramatically since early 2016, when prices were down as much as 10% from a recent peak. Compounding the misguided policies of the Hong Kong Monetary Authority, which Bloomberg alluded to above, the massive credit injection authorized by Chinese financial authorities has also contributed to the giant run-up in HK home prices, which have tripled over the past decade.

According to the latest data from Hong Kong"s Centaline Property Centa-City Leading Index of existing homes, prices in Hong Kong have risen an unprecedented 23% in the past year. Prices have increased by as much as 2% per day, and it seems that nary a week passes without home prices on the island setting some new record.

But what makes this particular bubble different is that this time, it is obvious to everyone. An editorial in The Standard newspaper published last month was surprisingly accurate: “successive moves by the government in recent memory to cool the property market only resulted in it becoming crazier. The result is a sea of madness.”

Yet these warnings have failed to deter local buyers, who have turned up in droves at each new property sale, where snaking queues of would-be homeowners line up in the hope of being the winning bidder for one of several properties for sales. At the Victoria Skye, a luxury project at the former airport site of Kai Tak and at the Ocean Pride development by Cheung Kong Property Holdings people were lining up days ahead of time for their chance to buy a home at all time high prices.

Another HK new home sales oversubsribed 14.8x today, not as hot as ystdy "cos >HKD18k/sq ft. Only hundreds buyers. pic.twitter.com/WrraPLudEk

— Simon Ting (@simonting) May 27, 2017

It is also obvious to the local central bank, which, like Vancouver and Toronto, appears powerless to halt the tsunami of hot mainland money spilling over the border. The Hong Kong Monetary Authority has been tightening rules for lenders, Bloomberg writes, including restricting levels of lending to developers, as it tries to limit financial risks and take some of the heat out of the market.

Speaking at a Legislative Council meeting last month, Hong Kong"s central bank chief, HKMA Chief Executive Norman Chan, said levels of demand were reminiscent of 20 years ago, just before Hong Kong suffered a property bust.

Chan expressed concern that people with limited financial resources were buying just because they thought prices would only keep going up, just like in a bubble. He said that while the global economy has improved, uncertainties remain and warned that when the property cycle reverses, "the impact will be serious.”

Bloomberg noted that the Hong Kong government, which champions the free market, has no immediate plans to prevent housing sizes from growing ever smaller, preferring to leave flexibility in the market so that developers can respond to demand as needed.

While Carrie Lam’s promises to raise home ownership rates sounds noble, similar thinking helped fuel the subprime bubble in the US. The US government created Freddie Mac and encouraged banks to try and help every willing borrower buy a home, even if they clearly couldn’t afford one. With this in mind, we ask: what’s the point of owning a home if, when the crash comes, banks foreclose, and buyers are put out - often in worse financial circumstances than they were in beforehand?