23 February 2019
Despite the steep rise in property prices, buying activity has remained in line with historical averages. Photo: Reuters
Despite the steep rise in property prices, buying activity has remained in line with historical averages. Photo: Reuters

HK property market less risky than 20 years ago: OKAY

Hong Kong’s property market has seen steep price appreciation over the past several years – with prices soaring an average of 60 percent in the last five years.

Some industry players are worried that the market could be facing a situation similar to that leading up to the 1997 crash.

But while the market may have shown signs similar to the environment 20 years ago, there are also fundamental differences, according to Joshua Han Miller, chief executive of Hong Kong-based real estate website

First, buying activity has not reached frenzied levels, Miller said in his latest post. This year property transactions have reached 5,000 to 7,000 a month, in line with the 15-year average of 7,180 deals a month and the 10-year average of 7,150 deals a month.

Also, despite the Federal Reserve’s current rate hike cycle, interest rates are far from risky levels, he said. Hong Kong remains in a very low interest rate environment, with rates hovering around 3 percent, lower than the 4 to 5 percent in most global economies.

By contrast, interest rates were over 9 percent right before the 1997 crash.

“People generally associate rising interest rates with declining real estate prices, which makes sense – the more expensive it is to borrow, the harder it is to purchase a property or pay an existing mortgage,” Miller said.

“However, it is easy to forget that during the first stage of a cyclical upturn in interest rates, interest rates rise because an economy is growing … The upcoming increase in interest rates will be driven by a strengthening US global economy, which also should support property prices.”

Besides, interest rates are largely predicted to increase very slowly, he said. It will take years to reach danger levels as it relates to the property market.

Another sure sign of a property bubble is overleveraging, or people borrowing more than they could afford to support when buying a property.

According to the Hong Kong Monetary Authority, the average loan-to-value ratio in the territory is 51 percent, lower than the 64 percent before the government introduced cooling measures such as the hike in stamp duty, and similar to the LTV in 1997 of 52 percent.

“But one should remember that excess debt is not what triggered the 1997 crash – that was a crisis of confidence in the broad financial markets,” Miller said.

“Other global markets typically operate at LTV ratios of 70 percent or more, and may approach 100 percent before a housing crash (which sends LTV values well above 100 percent). Hong Kong remains conservatively leveraged on this measure.”

But probably the most important difference between 1997 and 2017, according to Miller, is China.

“At the time of the handover, China’s economy was just starting its meteoric rise with a GDP of just under US$1 trillion today. Over the next 20 years it would grow to over US$11 trillion,” he said, adding that the economy appears to have the momentum to continue growing.

This means there is still a tremendous room for mainland Chinese investors to invest in Hong Kong, something which did not exist in 1997, Miller said.

“In many ways, Hong Kong is a safer economy than it was back then, and a ‘new normal’ is the natural result. So ‘record prices’ should not be compared to the highs of 1997 because the environment has changed,” he said.

Hong Kong, being a major financial hub in Asia and with its currency pegged to the US dollar, remains vulnerable to global crises, or Black Swan events that cannot be predicted.

But Miller concluded: “From what we can see today, Hong Kong’s real estate market is a good long-term bet, albeit an increasingly expensive one.”

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