Hong Kong: No Real Estate Bubble Yet

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

June 2005

Recent local and international media reports have been citing real estate bubbles in the USA especially some of the major coastal cities, China in particular Shanghai, and the UK namely London, thus giving the impression of bubbles almost everywhere. In Hong Kong, we have also seen major price gains and record prices in the luxury residential sector and certain selected retail properties, prompting some to think that perhaps we too may have a bubbly situation as well.  

Real estate analysis is not one of the easiest tasks on Earth and the proclamation of a bubbly condition almost always carries with it a certain degree of subjectivity, let alone the prediction on when the bubble will burst, even assuming that is possible. Despite the foregoing, your humble author does not think (at this moment) that there is a bubbly condition in Hong Kong real estate. Reasons: 

A)     The most luxury residential portion aside, the private mass housing sector is only playing ‘catch up’ = this refers to catching up with the economic performance as reflected in the GDP per capita figures. Compared to 1984 figure, the nominal GDP per capita was around 5 times as big in late 2003 when the real estate market generally started to recover. However, the nominal home price index was only approximately 3 times as big in late 2003 as it was in 1984 (it was 9 times as big in 1997). Given that GDP (per capita) is one if not the most important factors influencing home price (note: real estate is a derivative product of economic performance), this in late 2003 implied that it would not be surprising to see home prices rise some 2/3rds to catch up with the GDP level [ we had written an article on similar topics in late 2003: http://www.real-estate-tech.com/articles/SRS110302.htm ].

B)     The mortgage interest rate is still low despite recent increases = yes, one may say this is artificial or man (Greenspan)-made, but then again, real estate exists because of humankind. Thus by definition it is bound to be artificial and man-made, irrespective of whether rates are high or low and interest rate levels are not always a product of economic concerns only. The point here is it is EXACTLY because of such comparatively low interest rates that enable better housing affordability that in turn helps to define a no bubble situation than a bubble situation [whether low interest rates will lead to one is another issue].

C)    The office sector is still far from the peak price level in the 1990s = Grade A well managed office properties can be acquired for around HK$10,000 per square foot (sometimes a bit more sometimes a bit less) which is still a far cry from the heydays in 1990s. Naturally, one cannot deny a bubble condition simply just because office prices have not gone back to their previous levels, yet the typical tenants for such Grade A offices, ranging from sizable local companies to multinationals have generally been experiencing better profits and growths. In short, their current abilities to pay rents are by and large no different from / no worse-off than those of 1990s, though corporate budgets seem more tightly scrutinized these days.

D)    Except for prime retail premises, most retail locations may not be able to raise prices or rents too much = quite a number of retail outlets have been redesigned, renovated, and title-subdivided for sale to individual buyers in recent years, yet many such projects have not to date been successful in terms of creating demand or price / rent appreciation. It is mostly the traditional malls and hot retail spots that still command a price or rent premium.

E)     Industrial properties have recovered a bit = in terms of rents and prices but no bubbly market as yet.

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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