Price Boom For Kinder Chocolate Egg

Thank reader Johnny for his comments on how investment banks get people wrong about the property market movements. Frankly speaking, everyone makes mistakes. Investment bankers are human too. But still, the conflict of interest issue is debatable. Those who obtain property market information mainly from the newspaper, radio and television broadcast have similar problems. The media always get one side of the story, which is the UP side. Most property news reports are written based on their interviews with property developers, agencies, investment bankers and the government, which is balancing its budget thanks to windfalls from land sales. Inevitably, they are bullish. It happens that a substantial portion, if not the majority, of media companies' incomes come from advertisements sponsored by property developers and agencies. The interests of property developers, agencies, investment bankers, the government, and less noticeably the media are all tied together. If they were in an orchestra, the music would for sure be unpleasant because there are only high notes being heard. Low tunes are muted. Some newspaper readers feel good, while the over-played optimism might project the bubble image, scaring other people.

The Chocolate Bubble
Italians should be proud of their invention of Kinder Chocolate Egg. The candy has a chocolate shell that takes care of children's basic needs. Besides, it offers a fantasy, a surprise toy hidden inside the shell. The situation is like residents buying a flat for accommodation (the chocolate part) and for a value appreciation (the surprise toy) over years.

Ahead of Easter Holidays, demand for Kinder Chocolate Egg increases. It is the best Easter egg i can think of. The increased demand drives up the price of Kinder Chocolate Egg. Meanwhile, there are chocolate lovers all over the world who enjoy chocolate all over the year. Some of them also like Kinder Chocolate Egg. Some start to say: "Well, price bubbles are forming in the Kinder Chocolate Egg market. The price of Kinder Chocolate Egg rises much higher than other chocolate candies do. The high price cannot be sustainable."

However, as Easter nears, the increased price of Kinder Chocolate Egg forces these chocolate lovers to buy other chocolate candies, maybe Hershey's. Then, chocolate price goes up. Now, the expensive chocolate, in turn, justifies the expensive Kinder Chocolate Egg.

Where we are in a cycle?
Put it into prospective, the Hong Kong property market, now, is at the stage in which people keep asking if there are bubbles, seeing property prices (the Kinder price) rise much faster than rents (chocolate price).

Worse, the Hong Kong economy has undergone a structural change. Jobs are moving across the border. Among those lost jobs are not only construction and manufacturing, but also the more sophisticated ones such as those related to information technology and back-office administrative supports. Salaries and wages are seen to be stagnant in the coming years. Some wonder: "How can a higher property price be justified?"

As far as my Kinder story goes, the higher property price will be justified.

The Wealth-Driven Boom
The property market bottomed in the SARS-hit 2003. The overall economy also recovered. People have accumulated at least two years of purchasing power, from mid-2001 to mid-2003. Saving deposits are at record highs. If the accumulated wealth were released from saving deposits to the investment market, the property market would be one of the major beneficiaries. Another important source of purchasing power come from mainland China. The elite group is now enjoying the trade in Shanghai. They don't necessarily live in Shanghai. For some reasons, they may commit to properties here, once they see profit potentials.

Just like chocolate fans who cannot survive without chocolate, most people need to live under shelves. They either rent a place or own a property. In static circumstances, increases in property prices will drive existing homeowners and potential homebuyers to become renters. But in a dynamic situation, landlords hold their properties and leave it empty, to avoid tying up with renters, and thus making it difficult to resell. That tightened the supply of flats to let, and drive up rents. The higher rents, in turn, justify the high property prices.

This kind of "salary-growth-less" property boom is new to Hong Kong. From 1935 to 1997, the Hong Kong property market has experienced booms and busts, but the long-term trend was upward on the development of the city and the improvement of people's salaries. From now, the trend will flatten as the city's economy matures. But the cyclical pattern will continue as people's confidence on properties as storage of wealth goes up and down. Wealth-driven property boom is not impossible. In the 80's and 90's, HK people drove up the property prices in Vancouver. In recent years, technology venture capitalists drove up the property prices in California. Similarly, it is happening in Shanghai.

It is too early to talk about bubbles
The property sector runs like a train that stops only when it gets off the rail. It differs from a stock market, which drives like a taxi. The bull market of a property starts more slowly than the stock market. It takes time to build up the momentum. Once the momentum is built up, it tends to overshoot and goes far beyond the economic realities. As the bubble bursts, due to some triggers, the downward correction is usually over 40% or even more. The damage to the economy is much severe than that done by the stock market. It is difficult to imagine that the HK property can slump back to the SARS-hit period.

For now, interest rate is not yet a threat. During the crazy years of the property market, mortgage rate went up to 8% or even 10%. Interest rate rising from 2% to 3% doesn't matter, and will remain far below the breakneck point.

In the longer term, the aging population, the flattened salaries and the city's competitiveness pose major threats to the Hong Kong properties. After all, buying a property is no chocolate egg. One should take into consideration of the overall economy, as well as one's own financial plan.

Mar 23, 2005
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