Market Price Level and Comparative Prices

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

May 2004 

Often people think that the real estate prices of a certain neighborhood or district will increase when and if certain infrastructural facilities, be these roads, subway stations, or even prominent schools, are planned and developed. This seems logical as the quality of the neighborhood is enhanced, so will its real estate prices. However, actual observations may differ and what sounds logical may not always ring true. A major reason for the somewhat half truth is that many people do not (or cannot) distinguish the difference between (the more macro) market price level(s) that a certain large market sector / economy can command / sustain and (the more micro) comparative prices that exist among different properties within a certain neighborhood.

Factors that affect the macro market price level are generally economic-social-administrative-political ones, such as economic performance (as indicated by GDP etc), productivity, cost of money (real interest rate), overall knowledge and skill sets, global competition, demographics, and the like. Building a road or a railway station here and there may or may not imply the betterment of the economy as a whole i.e. it depends. For instance, New York City with its relatively high income households implies that its overall real estate market price level will be relatively high globally and nationally, under-priced or over-priced though this may be at times, but never considered cheap. Half a million US$ for any modest and up is not a surprise. Likewise, Hong Kong with is US$23,500 GDP per capita cannot expect prices to be so affordable that every Tom, Dick, and Harry (or Jane, Mary, and Rose) can enter the private residential market. Having an average HK$2M (US$250,000) price tag is not a crime. That is to say, economies with low GDP per capita and productivity cannot sustain an overly high real estate price level for long, foreign wealthy investors notwithstanding.   

On the more micro level, and using the residential sector as an example, a project that offers more convenience by way of shopping, entertainment, transportation, and the like, is more likely to be better received than ones that do not offer the same convenience, given all things being equal. Yes, a project with good access say to the subway sells better most of the time. Nonetheless, these advantages do not guarantee that the prices of the better project will not drop IF macro factors turn for the worse. For instance, say a better project can sell for HK$5,000 per square foot of floor area when times are good and other less advantaged residences can only obtain HK$4,500. Now assume the economy turns for the worse and our better property can now fetch only HK$4,500 per square foot. The less advantaged properties will now probably for around HK$4,000 (or to the mathematically minded HK$4,050). The premium gap between the better property and the other ones is kept yet it does not save the better property from having decreased selling prices. Whatever infrastructural amenities that it has over the others do not help very much.

The above leads to the question of when to consider macro factors and when to take into account the micro aspects. When investors are eyeing a certain market or sizable market sector, macro factors count for more. It is not quite useful to see if a school would add to the appeal of a project prior to assessing if in fact the market in which the project is part of makes investment sense. Only when investors have decided to enter a certain market or sector does detail investigation into the micro aspects bear logic.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

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