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
Copyright Quamnet
2006/12/11
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
Copyright Quamnet
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
Copyright Quamnet
訂閱：
文章 (Atom)