The article below
first appeared in the New York Times (NYT) this week and was picked up by our Business
Times yesterday:
HK home
property prices continue to defy gravity
There are
breathtaking views of Victoria Harbour from a 23rd-floor apartment that recently
sold for US$722,000 in the new Le Riviera
building. The high-end German appliances and marble countertops evoke European
luxury. In the entrance of the building, colorful wire mesh sculptures by
Spanish artists hang in the ceiling.
There is just one
catch. The apartment is only 275sqft, with a bedroom just large enough to
accommodate a double bed.
"If we don't
buy now, we might not be able to afford it later," said Frank Wu, 60, the
new owner of this so-called microflat in Shau Kei Wan, a former fishing village
on the north-eastern edge of Hong Kong Island.
Real estate in Hong Kong defies logic. The city is one of the most
expensive places in the world to live and it has smashed one real estate record
after another for years. As property costs continue to soar, even once improbable
living spaces are now getting snapped up at astronomical prices.
At Le Riviera , three-quarters
of the units sold so far have been microflats like the one Mr Wu purchased. And
Hong Kong developers are putting smaller and
smaller units on the market - one recently built 165sqft apartments.
For many young
adults who live packed and stacked in with their parents, it is becoming harder
to imagine having a place to call their own. Rents have skyrocketed. And some
here now worry that the real estate market could stumble, particularly if the
US Federal Reserves starts to raise interest rates next year. Lending in Hong Kong is tied to the American rates.
From a low point
of Hong Kong's property market in 2003, average house prices have increased by
more than 300%, according to data from the Centa-City Index, which is compiled
by the real estate agency Centaline and the City University of Hong Kong.
Helping to propel
this rise has been Hong Kong's thriving economy, which significantly expanded
over the last 10 years after the rapid growth of China . Strong demand from wealthy
mainland Chinese and limited land supply have also helped to prop up prices,
although this effect has slowed since the government put into effect a series
of cooling measures, like additional taxes paid on property purchases.
First-time buyers
now dominate the market, spurred on by the ultra-cheap interest rates, which is
currently below 2%.
But the frenzy in
Hong Kong 's property market may soon fade. The
Hong Kong dollar is pegged to the US dollar,
so the interest rate policies are linked. When rates go up, those who have
borrowed money to finance new homes will feel the effects as their mortgage
payment rise. This concern is more pronounced in Hong Kong ,
where mortgages are not set at a fixed rate.
"They are
making themselves slaves to the property market," said Nicole Wong, property analyst at CLSA.
Many Hong Kong residents still remember the last property
bust, which was set off by the Asian financial crisis in the late 1990s. As Hong Kong 's economy took a hit, unemployment rose and
deflation set in, chilling prices. The outbreak of Sars in the late 2002 exacerbated
the descent in prices by mid-2003, property prices had hit rock bottom.
But developers
seem undeterred for now. They continue to build new properties, increasingly
with incentives like tax waivers, which can amount to as much as a 10%
discount. Microapartments are a small part of the offerings, but they are
growing, with a handful of developers jumping in. This is partly because the
overall price tag looks cheaper than bigger units - especially father afield
from Hong Kong island - making them more
affordable to a wider swath of buyers.
Even by Hong Kong standards, the latest apartments offered by Li
Ka-Shing, are remarkably small. At Mont Vert, developed by Mr Li's company
Cheung Kong Properties, some units range from 165sqft to 196sqft.
Propspective
buyers interested in a recent batch of similar units were not even able to see
them before they agreed to buy, a common occurrence in Hong
Kong .
Mr Wu, who
acknowledged the risks of buying the Le Riviera flat when prices were so high,
does not seem too concerned. He said that he and his wife could always move in.
Surveying the
empty bedroom, he added, "It's all right for me."
Source: NYT
Although the situation in Singapore is not quite as severe as that of Hong Kong, the wife and I can certainly draw quite a few parallels between both markets - the lure of low mortgage rates, the risks of over-commitment once interest rate rises and the fact that developers are pushing out smaller and smaller apartment units to provide the illusion of "affordability" despite charging sky-high psf.
One may argue that measures are already in place to
ensure that prospective home buyers in Singapore cannot over-commit
themselves financially. However, if they (especially the new or
"inexperienced" buyers) stretch themselves too thin, an adverse
change in circumstances - whether be it worldwide/regional economic conditions or
a simple case of rising interest rates - may just nudge them over the tipping point...
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