Tuesday, March 27, 2012

Crisis? What Crisis?

This flyer came to me in the mail this past weekend from one of HK’s well-established real estate brokers. The area of Mid-Levels that is featured is predominantly populated by foreign professionals in Hong Kong on expatriate packages or housing allowances, and wealthy locals (although not the tycoons, who occupy the Peak and other even-more exclusive enclaves). The table below summarizes the dwellings on offer, translating the prices into US-dollars and calculating the amounts on a per-square foot basis.

The result? Hong Kong’s premium residential real estate is back at an all-time high, with prices rivaling the giddy times of early-1997, just prior to the Asian financial crisis. Back then, when the bubble burst, prices tumbled steadily over five years, during which time the market struggled through currency crashes throughout Asia, followed by the dotcom blow-up, Enron/WorldCom and other corporate shenanigans, and lastly SARS. When the market finally hit its nadir in 2003, it bottomed at close to 40% of 1997 levels. The buzzword that year in the real estate market was “negative-equity.” Ouch.

Since then, with only a brief dip (a decidedly false summit) following the global financial crisis of 2008, the Hong Kong property market has seen a steady, relentless climb to its current perch at the top of the world. The key drivers to the price rise have been a HK-dollar pegged to the chronically weak US-dollar and its low interest rates, and feverish buying by mainland Chinese.

It’s a well-known story, but the actual prices still are mind-boggling. Basically, nothing – not even a 400-square-foot unit that is barely big enough for a Hong Kong mistress and her shoe collection to stand upright in – sells for less than $2,000 / sq. ft. The average for the group is $3,175 / sq. ft. The most expensive listed, Dynasty Court, at $10.7 million, is priced at close to $5,000 a square foot. Yes, Dynasty Court has a stirring view of Hong Kong harbor, and the health club sure is well appointed. But that kind of money could buy an awful lot of pretty postcards and gym memberships, with money to spare for a lamborghini or two.

At the end of 2011, pundits were predicting a market correction of 20% or so for this year. Now, doomsayers are not quite so strident. Prices are up 5% month-on-month from February to March. The US-economy is on the mend, the euro-crisis is taking a few months off to catch its breath, and the Chinese government is starting to act in a more accommodative way to address slowing domestic economic growth. Of course, risk factors for the real estate market remain. The newly elected leader of Hong Kong, CY Leung, has set reining in runaway property prices as a key policy agenda. Furthermore, the euro-crisis is by no means resolved – thinking so could be like wiping yourself while seated on the potty before you are sure that you are done with business. And if China experiences a hard landing, Hong Kong property will likely collapse with it.

But don’t bet on any meaningful corrections in the near term. Hong Kong’s place in the world is unique. It is arguably the coolest place in the world to live now if making money is one's aim. So HKers had better get used to the idea of living in dramatically expensive, shoebox-sized dwellings. An address in Blahnik Estates, anyone?