Kinder Chocolate Egg & Hk Property Market

In Hong Kong, we call it property. We talk about the property market. In the U.S., they call it home. They watch monthly home sales statistics. Property and home both refer to the shelves we live in. The word property emphasizes the resell value, while the word home focuses on the functionality as a shelf. Hong Kong adopted its affection for property ever since British colonized the place. Few months after the British took over Hong Kong Island, in 1841, the first land auction was launched. Jardine Matheson showed how to invest in properties and get decent returns over years. Local tycoon Fok Ying Tung, through the pre-sale scheme he pioneered in 1953, taught us how to use the leverage of a small deposit and bank in multifold returns in the count of days.

Americans in recent years might have changed their attitude toward what they refer to as home, as they do speculate in homes more often than before, thanks to the current boom.

Chinese don't call an empty shelf a home. Home carries the sense of family that money can't buy. Let's stick to the more accurate terminology, property.

Residential properties, to put it into perspective, offer a combination of functionalities as shelves and the storage of wealth.

Flour & Bread? No, It's Chocolate Egg
The relationship of land and property is often referred to as that of flour and bread. This is from property developers' point of view. From property owners', they are more like buying Kinder chocolate eggs, candies that contain small surprise toys inside them. The Easter Holiday is coming. And i loved Kinder as a kid. The chocolate part is the basic function, just like a property serving as a place to live. The edible part will be gone fast, especially in kid's hands, like the aging of the property. However, the truly excitement came when i found out what toys were inside, and that's what i cared for most. And the return of that value is to be discovered way after the candy is bought.

Similarly, the land value is what property-buyers care for most. For properties, the value takes years to be realized.

Let's analyze the chocolate egg first. To buy the candy (property), i must go to mum (the bank) to get the money first. i had to promise mum (the bank) to do our homework (pay interest) and be obedient (on time). Then, i bought and owned the candy and of course the toy inside. Alternatively, without bothering to ask mum, i asked a schoolmate (landlord) to let me eat the chocolate only (to rent) in exchange for a little favor. The schoolmate still kept the toy.

Which way is more favorable?

To Own or to Rent?
Flat-owners' cost = interest + property buying price - property selling price,
Where buying price - selling prices = property depreciation - land appreciation.

Hence, Flat-owners' cost = interest + property depreciation - land appreciation

Renters' cost = rents.

Rents are currently 3-4% of the value of the property, depending on individual properties. On the other hand, homeowners have to pay 2.2% in mortgage rate and bear a depreciation of the asset at a rate close to 2% a year. i don't want to bore you with the calculation here. But the basic idea is that at the present situation, it doesn't make a big difference between renting and owning a flat, unless the interest rate or land appreciation deviate substantially from the overall inflation.

From this point of view, property prices at the current level are about fair.

Here we come to the toy part.

The Toy Part
Textbooks taught us that the HK property market rose because of the limited supply of land, rapidly rising population and improving income of its residents. These same factors had contributed to the Japanese housing boom until the early 1990's.

Looking ahead, these favorable factors are set to weaken. In recent years, the supply of reclaimed land and bettered railway network has provided Hong Kong with extra land, mainly in Tseung Kwan O, Ma On Shan and West New Territories. The population growth has become stagnant, thanks to the low birth rate. Personal income growth has slowed after the economy has already transformed from manufacturing-oriented to servicing.

From overseas experience, it seems that these factors are sufficient, but not necessary.

Shanghai has plenty of land but its property market is experiencing a big boom. Improvement in income could be one of the driving forces, but the market has risen far ahead of the income growth. An apartment there, according to colleague Henry Chan, is now priced at as much as 18 years of average family income. Across the Pacific Ocean, the property market in California has had a strong rally. Income there has been stagnant since the bursting of the technology bubble back in 2000. Low interest rates are a well-known factor driving Californian properties.

More importantly, Californians accumulated huge wealth during the technology boom. The huge accumulated wealth of Chinese elites has also become a strong driving force for the Shanghai property boom.

Property is More than A Shelf
Properties are sometimes bought for the storage of wealth, but not for the accommodation purpose. Many investors prefer properties rather than securities. Property gives such a strong visual impact that investors of it feel secure.

Think of gold. If the asset value depends solely on the income stream it generates, gold would be much less valuable than it is. Unlike steel and aluminum, gold has few applications for industrial purposes. Unlike stocks, gold doesn't generate any dividend income, not to mention that holding gold, physically, costs storage fees. Its investment value is simply based on the belief that, someone, someday in the future, will buy it at a higher price.

Gold serves to store wealth, as do properties.

Sometimes, the storage of wealth, rather than the accommodation function, takes the leading role.

Will the Property Boom Return?
Hong Kong has gone through the development stage, in which property investors earn easy money. Will the good old days return? Is it possible that Kinder chocolate egg undergoes a major price boom while kids remain as poor as before? The answer is: Yes.

Now, it's almost 5pm on Tuesday, and i am rushing for the deadline. i have to stop here and will continue next week.

Mar 16, 2005
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