Real Estate Prices May Rise Despite Unemployment

Stephen Chung

Executive Director

Zeppelin Real Estate Analysis Limited

October 2003 

Recently, friends and clients have been asking if the Hong Kong real estate market, especially the residential sector, has bottomed out, and if so, they wish to know if prices may soon rise. The simple answers to the foregoing are that the market is at the bottom portion though a bit difficult to say if it is right at the trough, and second, it will not be a surprise if prices are to rise some 30% or more at some point(s) within the next 3 to 5 years, while noting this is different from saying that prices will be 30% or more 3 or 5 years from now.

Some think the above seems a bit optimistic, given the still high unemployment rate of over 8%, declining personal / family income, and poor overall economic performance. True, and this is good rational thinking, yet markets are not rational all the time, and this has also to do with the way market prices are structured or set. Elaboration as follows: 

A)     Market prices reflect the buying and selling interaction of those buying and selling at the time = happily or not, these buyers and sellers (market participants) have agreed to use those prices as consideration in the transactions, and generally these market participants and their related transactions occupy only a very small percentage portion of the whole market and real estate stock.

B)     Yet this small collection of market participants and transactions set the market prices at the time = irrespective of whether / how the rest of the market (participants) view the market and such market prices, and there is no practical and efficient way to gauge the market views of such non-participants. Nonetheless, it is safe to say if such non-participants view the market prices as reasonable, then the market is likely to be sustainable, and vice versa. Naturally, such market views are also influenced by the market prices and may change as circumstances change.

C)    The unemployed and the low-income sectors of the population may not be active market participants = Apart from being forced to sell their real estate assets / homes, the unemployed are unlikely to be active participants. The low-income families generally live in government housing and enjoy subsidized services and thus are not active in the market too. Hence, the societal sectors most affected by the poor economy are generally not very much involved in the real estate market, and thus are not the ones to contribute to any (private) market prices. It is those societal sectors or families that still potentially have the necessary resources, including financial ones, to participate in the market that contribute to market activities and thus market prices, and it is due to the poor economy (in part epitomized by higher unemployment etc), poor sentiment, lack of confidence, even fear of losing ones financial capacity, or the like, that they have not been too active in the market.

D)    Real estate prices may rise despite unemployment = this is not a must but is neither an impossibility too, and if and when the potential market participants feel positively enough, rightly or wrongly, to enter the market, prices will have a chance to go up. For instance, Canada has a relatively high unemployment rate hovering around 10% since the 1990s, and yet prices say in Toronto in the last few years have risen from a mid-90s low of C$190,000 to the current C$270,000.

E)     Will the current homeowners be able to buy their homes given their current financial resources (income, savings, and assets owned discounting the home in question)? = Obviously this is a hypothetical question but nonetheless it will throw a light on whether the market makes sense or not. If the answer is yes, the market is generally healthy, and vice versa.

Active market buyers and sellers set the market prices of the time, and such prices may or may not be sustainable, the latter of which may still rule the market for a short while, though in the long run some supporting market fundamentals are required. The point is potential market participants may sit by the side if the economy is poor and especially if they think prices will still go down (rightly or wrongly is beside the point), but seldom due to someone being poor or out of work. 

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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