home truths
Although there are many reasons why mainlanders want to buy homes in the city, it is clear that the property market is a favorite investment. Li Tao reports.
Brian Guo, a mainland-born lawyer who has been practicing in Hong Kong for more than three years, made an important decision late last month – buying a home of his own in Hong Kong.
Once he saw the price tag of HK$3.25 million on the eight year-old 500 square foot flat, which is located just 10 minutes away from two MTR stations in west Kowloon, the 29-year-old bachelor said he made up his mind and paid the HK$20,000 initial deposit immediately.
Guo said there were a number of factors at play that convinced him that the deal was a good one.
Not only did the bank grant him a favorable mortgage rate compared with the market, he only has to pay around HK$10,000 to the bank every month for the next 30 years – as long as the interest rate remains unchanged.
“Home prices in big cities such as Shanghai and Beijing on the mainland are also rather expensive these days. To me, the price of a flat in this condition in Hong Kong is rather surprising,” said Guo.
“People told me Hong Kong’s home prices are likely to drop by about 20 to 30 percent in the next two years. Since I am buying the apartment for personal use, price changes do not affect me that much,” he added.
Guo is just one of an enormous number of mainland home buyers in Hong Kong these days. Though the reasons for why they may want to own a house in the city varies from person to person, it is clear that the property market is one of the favorite and most popular forms of investment.
According to data provided by investment bank CLSA, mainland buyers now constitute 40 percent of all transactions in the city for the launch of new residential projects of HK$12 million and above. And for units priced below that amount, they are still snapping up a sizeable 22 percent of them.
And when it comes to the sales of second-hand homes in the city, mainland buyers are not only active in the market but breaking records.
This May, local reports said a 28-year-old woman from Guangdong province bought one of the most expensive apartments in Hong Kong – a 7,747 square foot unit overlooking Victoria Harbour that cost a cool HK$345 million.
Hong Kong’s home prices have been rising at a rate of 2 percent per month over the past 30 months, driven by growing wealth on the mainland.
According to Centaline Property Agency Ltd, Hong Kong’s residential prices have surged more than 70 percent since the beginning of 2009, surpassing the previous peak of 1997 when the city’s property bubble burst in the wake of the Asian financial crisis.
Surging rents in Hong Kong may have also helped convince investors to enter the market as well, according to Thomas Lu, a property analyst at real estate broker Professional Properties. As long as you can afford the down payment, the monthly income you receive in rent from leasing the property can cover the mortgage.
In Guo’s case, Lu reckoned that his flat could fetch a rent in the range of HK$12,000 to HK$13,000 a month, well above his mortgage.
Moreover, with the Hong Kong dollar pegged to the US dollar and mortgage rates remaining at record-low rates since 2008, it makes it far cheaper for mainland investor to take out a mortgage in the city.
In his case, Guo has to pay a bit less than HK$10,000 to the bank each month for the HK$2.93 million he borrowed to buy his flat in the city. But on the mainland, where the central government has raised interest rates several times in the past year to combat inflation, he would have to pay 19,100 yuan each month for a loan of 2.93 million yuan over 30 years – almost double.
“Mainland investors owning properties in Hong Kong is not just about winning admiration these days,” said Nicole Wong, regional head of property research at CLSA. “The yuan’s appreciation and government restrictions on the property sector have driven more mainland investors to Hong Kong where they expect some notable returns.”
Though a research report released by Barclays Capital Asia in April forecast that the city’s average home prices will fall as much as 30 percent as banks increase their mortgage rates, most property analysts in Hong Kong, including Wong, see less risk of a price correction in the short term but rather growing at a more moderate rate.
Despite recent government warnings about the affordability ratio – a measure of mortgage installments relative to household incomes – noting they will climb notably if banks raise their interest rates, Lu said that this is not the problem it was during 1997. This time the government has raised down-payment ratios , so home buyers now are paying smaller monthly mortgage payments than in the past. So an affordability ratio of 50 percent in the current environment certainly lessens the risk compared with 1997 when ratios were at 90 percent.
Although the property market in Hong Kong is still healthy, CLSA’s Wong believes that returns from the market are not really as much as many mainland investors may have expected.
She explained that if Guo rents the flat he bought for a hypothetical HK$12,000 a month, Guo would have to pay a total rent of HK$140,000 a year.
Minus the HK$28,000 interest rate from the total mortgage Guo pays to the bank in a year (according to Wong’s calculation, for a 12-month-mortgage the principal is around HK$87,000 and the interest rate is about HK$28,000), it leaves a total “gain” of HK$112,000 to Guo each year between buying the flat and renting the flat.
“But if we divide the home’s full amount of HK$3.25 million by the HK$112,000 he ‘earned’ every year, we found that the ‘return’ is only 3.25 percent, which is even lower than the Hui Xian Real Estate Investment Trust,” said Wong, who added that if home prices do start to fall, buying the home for investment purposes would mean it would trade for a loss.
The city’s home prices, according to Wong, are just too high to invest in for good returns.
She believes that renting a house, though hardly a cheap proposition these days, is a better choice as people would bear far less risk from a potential property bubble, and they could invest their down-payments in more profitable vehicles.
However, looking at it from the viewpoint of people from the mainland, Professional’s Lu said having a property is a very traditional notion in Chinese culture, and as long as they are capable of paying the down-payment and can afford the mortgage, they would still prefer to purchase property if they believe home prices will not drop off.
Bobby Wang, who is also originally from the mainland, studied at a local university starting in 2004 and now works as an analyst for an investment bank in the city.
Wang regrets having missed a chance to buy a well-maintained, 400 square foot second-hand flat near the house he rents in Western District, which was selling for only HK$2.5 million in early 2009 but is now priced at more than HK$4 million.
“If I stay in Hong Kong in the long-term, I will still consider buying a flat of my own irregardless of the price. Hong Kong’s home prices go up and down, and it will still swing higher some day even if it slumps. After all, it only depends on my real needs,” said Wang.
(HK Edition 06/24/2011 page2)
http://www.chinadaily.com.cn/hkedition/2011-06/24/content_12764339.htm