Inflated Floor Areas Part 2:
Ridding Them Doesn't Lower Prices
Real Estate Analysis Limited
humble author has stated in Part 1 of this article
earlier articles such as ˇ§Average Home Price does NOT increase with
Increased Average Floor Areaˇ¨ [September 2002:
rightly or wrongly, taken for a ride by inflated floor areas is one thing,
thinking deflated floor areas would mean lower home prices is delusional.
what a family or homebuyer could afford is a relatively fixed budget. One
earns $X and thus could afford, maybe, a $3X, $6X, or $10X home as the case
may be. However, going for a $15X or even 20X home could be financially
for a real estate speculator:
one who has the clout, via equity or borrowings, to assemble $100M could bet
on $100M of properties. To ask the same person to go for $150M is impossible
unless more money is made available.
from another angle, the sellers a.k.a. real estate developers
seeking to entice, or squeeze if you like, the prospective buyers and
speculators to come up with all the available dollars in their possession.
Knowing that a buyer has the power and is willing to pay $10M for a home, it
would be incompetent of the developer to only get, say, $9M.
can one buy for HK$9M (around US$1.15M)?
depends on the city (an economy) in which the buyer is seeking a home. For
instance, in Hong Kong, assuming a middle class neighborhood, one may get an
800-1000 ft2 high rise apartment. In California, perhaps a big detached
house. In a remote Canadian small town, perhaps the priciest estate home, if
any exists, in the neighborhood.
overall point is: developers make money by producing products (real estate)
which match the various strata of buyer pools and NOT by selling more floor
only seems to be so because the prospective buyers still have further
purchasing power (money) which has not been formerly revealed. That is, the
developers put in more bells and whistles (including more floor areas) to
entice the buyers, and the buyers oblige and reveal they can pay more. Given
that developers have the upper hand in 1st hand newly built
property transactions, the buyer pools will usually be at a disadvantaged
position, especially when the market is hot. That is to say, when and if the
last dollar has been squeezed, more bells and whistles will not gain the
developers any more money, yet the developers generally have years of
practice and experience in knowing how many more bells and whistles are
required, and when to stop.
occurred recently in Hong Kong can be illustrated by this simple (and
the typical car market, buyers going for the Benz and BMW versus those
wanting Camry or Accord could be 1: 9, 2:8, or 3:7 etc. Likewise, in a
typical residential market, purchasers going for pricey homes versus those
affording average homes could be in similar ratios. In short, there are
usually more buyers for simpler homes (and cars).
and behold, all of sudden there come plenty of Benz and BMW homebuyers,
raising the ratios to 4:6, 5:5, or even 7:3 etc.
car market, where producers may build more to meet demand, real estate
production tends to be less flexible. First, land sites are limited. Second,
there are always the time-consuming approval and construction processes.
Third, some developers may, in view of more wealthy buyers, reserve formerly
average sites for pricier projects.
mean some formerly average homebuyers are now PRICED-OUT of the market
average buyers who could still buy a tiny Benz property would feel sort of
taken. From the angle of developers, however, assuming all factors being
equal, the profit derived from selling a pricier property could be several
times that of selling an average unit.
all these (new) wealthy purchasers come from?
North-East-South-West but probably more North these days. Well, asking the
US Federal Reserve (and the other central bankers around the world) and
peeling into QE1, QE2 etc may also help.
any solution in sight?
Not really. Having the Hong Kong government increase land supply may be one
but its actual effect will not be felt at once. Also, given the cause being
a monetary one, perhaps it requires a monetary answer such as doing away
with the HK$ to US$ peg which, however, in turn carries a lot of
uncertainties, requires an experienced monetarist team (and luck?), and
impacts a broad spectrum of activities and places, definitely not something
to be taken lightly. It is also beyond the knowledge, experience, and
capacity of your humble real estate analyst-author i.e. read the disclaimer
below and Caveat Emptor!
Financial Secretary Mr. John Tsang said Hong Kong is caught between fire and
ice. Earlier, our ex-Monetary Authority chief executive Mr. Joseph Yam had
remarked we are now in rare financial chaos not seen for 100 years.
have a point.
The article and/or content contained herein are for general reference only
and are not meant to substitute proper professional advice and/or due
diligence. The author(s) and Zeppelin, including its staff, associates,
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reference to the content contained herein.
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