Hong Kong Residential: 1st and 2nd Hand are Different Markets

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

June 2009

Your humble author is NOT referring to differences such as 1st hand means buying direct from a real estate developer and that the property will be brand new, or for that matter, 2nd hand (secondary) involves dealing with an individual owner of an old or occupied property.

By .different・ we mean this: the 1st hand residential market caters now mostly to the wealthy or wealthier and the 2nd hand market, as a whole, is still dominated by typical (average) home transactions. Here are the observations and numbers (the data is obtained mostly from the website www.centanet.com of Centaline Agency based in Hong Kong):

A)      From January 2008 to now, the average price of the 1st hand transactions ranges from lows of around HK$5,000,000 to highs of over HK$14,000,000 [HK$7.80 = US$1.00]: whereas the average price of the 2nd hand transactions hovers between HK$2 million plus to HK$3 million plus. Note the current average price is roughly HK$3,100,000 [refer to chart A].

Chart A

Also, as can be observed from the above chart, there is little or no relationship between the 1st and 2nd hand markets in terms of price trends. This means 1st hand market prices going up (or down) can tell us nothing about how 2nd hand market prices will behave, and vice versa.

In fact, we have done a simple correlation calculation and found the R value between the 1st and 2nd hand market prices is slightly negative i.e. the 1st hand and 2nd hand average prices tend to go opposite ways although the R-square (R x R) value indicates the relationship is not strong enough to say in definite terms when the 1st hand market price goes south (or north), the 2nd hand market price will go north (or south).

B)      1st hand transactions occupy only up to around 20% of total residential transactions but could at times represent 30%, 40% or even 50% of total transacted values [refer to chart B]: Furthermore, the 1st hand market could vary tremendously from month to month in terms of number of transactions, with the highest month having a number 20 times higher than that of the lowest month.

These contrast significantly with the 2nd hand market where the ratio of the highest to lowest monthly recorded transactions is 5.

For the mathematically-minded, the volatilities for the 1st hand and 2nd hand markets in terms of number of sales and purchase agreements are 0.83 and 0.43 respectively i.e. the higher the figures, the higher the volatilities. 

Chart B

C)     The average 2nd hand home in Hong Kong has lost around 18% of its value since January 2008: it was HK$3,800,000 in early 2008 but the current figure is roughly HK$3,100,000. The drop was not a straight line down and there were ups and downs along the way [refer to chart C].

Chart C

D)     The 2nd hand market average price exhibits a downtrend still: although there seems to be some sustainability at around the HK$2,800,000 level, especially if one is to adopt a stock price-index trend type of interpretation. Note this $2.80M level has been reached not once but 3 times, namely around August 2008, October 2008, and March 2009 [see chart D].

Chart D

Very roughly and given the typical private Hong Kong home is around 650 square feet (ft2) in floor size, an average price of $3.10M means an average price per ft2 of HK$4,770. With typical-average rental rates hovering in the HK$10+ per ft2 per month, this translates into rental yields of around 3% after taxes, fees, and other deductions.

This is not a particularly attractive yield although it compares relatively well to the practically non-existent bank deposit interest rate, thus making some investors .feel・ good about it.

Author・s note: while average prices obtained via actual transactions may be skewed, up or down, by exceptionally highly or lowly priced sales, these drawbacks, if any, could be small or even negligible IF the transactions are numerous enough. As such, the reliability of the 2nd hand market is better than that of the 1st hand market as normally the 2nd hand market has more transactions.

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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