Hong Kong Residential Market: Nearing Bottom Does Not Equal Recovery

Stephen Chung

Executive Director

Zeppelin Real Estate Analysis Limited

September 2003 

Recent conversations with friends often touch upon the outlook for the residential sector. Your humble author does not have a crystal ball and hence does not have a definite $$$$$ answer. Nonetheless, if a guess is to be made, possibly there is still a chance to go down a bit further though not by much. Anything more drastic will need very negative factors and we do not sense anything so drastic yet. A few technical viewpoints:

1)      Using the 1997 peak price levels as being equal to 100 = the number now is hovering just a bit above 30 based on Centaline・s index.

2)      A total drop of 70% seems about it = we had in January 1998 published an article saying that prices might dropped more significantly than most people back then had thought possible (at that time the market had gone down by around 25%). Using a simple quantitative model, we came up with total drops of up to 50% or even 70% (see article at http://www.real-estate-tech.com/articles/Retech6c.pdf).  We still think the broad content applies today, and the drop rate will slow up.

3)      Can we rule out further drastic drops in prices? = NO, but very negative factors will be required, such as some global / USA economic meltdowns etc. Barring these, to expect prices in the next 6 years to behave as they had in the past years is not realistic, just as it was not realistic for people to think that prices would continue to shoot up the way it had in the mid 90s in 1997.

4)      The .explainable・ range lie somewhere between 30 and 70 = Being .explainable・ means some (rational) factors or conditions can still be found or used to explain those price ranges / levels, beyond which only relatively abstract but could be very real factors such as over-confidence (for ranges above 70) or under-confidence (for ranges below 30) can do the explanation. In short, human emotions have taken over rational thoughts above or below such ranges. Please note being .explainable・ does not mean a good buy or for that matter a price recovery. Naturally, going from the current 30 back to 50 is easier than going from 50 to 70.

5)      Views that prices can soon increase by 30% = many people certainly hope so and we would be happy as well, though the parameters for such views seem to depend on having Mainland investors scooping up some of Hong Kong properties. This may sometimes do the trick for a while (whether it is 30% or more is another question) yet it is rare for a real estate market to be sustained long term simply by having out-of-town investors. Nonetheless, a 30% rise means going from 30 to 40, and this is quite possible taking a medium term view. As to whether one should sell or buy more etc requires individual analysis, as markets may favor selling or buying, it does not automatically mean everyone should sell or buy. Nonetheless, as a general statement, should the 30% be gained in a very short term, selling is favored.

The above is quite rough and is for basic thoughts only. Views can also change with time and with new information. Investors should check with relevant professionals prior to making investment decisions.

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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