Hong Kong’s Property Bubble Is Protest-Proof

(Bloomberg Opinion) -- It will take more than a few protests to cool Hong Kong’s real estate market. The latest round of social unrest has homeowners worried that the local economy, especially the property sector, will suffer. In fact, the market is only going to get hotter – if it can weather the current round of chaos.

The city has been in turbulence since early June, amid massive demonstrations against a proposed bill that would allow criminal suspects to be extradited to mainland China. Hundreds of thousands of people took to the streets on three separate occasions, culminating in the unprecedented invasion and trashing of the Legislative Council building by a minority of protesters on Monday. The intermittent chaos has interrupted normal daily life, leading to the closure of transportation systems and shopping malls.

During the tumult, a listed property company forfeited its $3.2 million deposit on the purchase of commercial land listed at $1.41 billion, and a wealthy individual buyer walked away from a $1.6 million deposit on a $32.2 million luxury home. Many in the media took these two events as a sign that the real estate bubble was finally going to burst. Yet the overall market has remained firm, with values as measured by the Centa-City Leading Index less than 1% off its record high reached in late May.

To understand why prices are so high, let’s look at what keeps this bubble aloft in the first place. The average purchase price for a home in Hong Kong is $1.23 million, according to property services firm CBRE Group Inc. The city posted its second-best year for real estate sales ever in 2018, at $93 billion. Yet for the majority of the city’s approximately 7.4 million residents earning the median annual income of $38,500, buying into the market is simply unaffordable.

Those fortunate enough to purchase a home devote 70% of their monthly income to their mortgages on average. The affordability ratio (monthly mortgage payments as a percentage of median income) is more than 60%, the highest it’s reached since the last property bubble in 1997. In other words, buying property in Hong Kong is a rich person’s sport.

Costs have become so prohibitive that some home-hunters are willing to ruin their feng shui by purchasing apartments believed to be haunted by the ghosts of murdered former inhabitants. Additionally, whenever developers slash prices, buyers snatch up whatever’s available.

The bubble reflects an enormous housing crisis with no easy solution. The Hong Kong government greatly underestimated the need for new home construction, Our Hong Kong Foundation said in a recent study. Housing supply will slump 40% in the five years through 2022-23, the think tank warned. In many Hong Kong households, three generations now live together because younger family members have been unable to afford high rents or to buy in the past 10 years, according to a researcher on the report cited in the South China Morning Post. This pent-up demand isn’t reflected in the official projections.

The study questioned whether the government’s target of constructing 450,000 new units in the next decade will be enough to satisfy demand. Given the fact that Hong Kong is running out of available land on which to build, it’s hard to see how prices can fail to stay high for the foreseeable future.

Interest-rate cuts in the U.S. would exacerbate the situation. While the Federal Reserve left rates unchanged at its meeting in June, Chairman Jerome Powell opened the door to a reduction as early as this month, saying downside risks to the U.S. economy had increased recently. In this event, expect Hong Kong to follow suit. The city’s interest rates track those in the U.S. because of the currency peg to the dollar. Lower borrowing costs would give a further boost to the Hong Kong property market.

An added tailwind has come from Osaka, where the latest meeting between Chinese President Xi Jinping and his U.S. counterpart Donald Trump appeared to secure another temporary trade truce. The effect on property sales in Hong Kong was instant. Lingering tensions over existing tariffs could still plunge the world into an economic tailspin, and any global catastrophe could shock the entire system into submission. But for now, steady interest rates will continue to entice home buyers.

As prices keep rising, rather than applying the old adage of “buy low, sell high,” a more applicable mantra may be, “buy high, sell higher.” Hong Kong may have signs of a bubble, but it seems to be one made of steel.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ronald W. Chan is the founder and CIO of Chartwell Capital in Hong Kong. He is the author of “The Value Investors” and “Behind the Berkshire Hathaway Curtain.”

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