Property bubble bursting? Two things to watch out for.

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I read an interesting and easy to understand article in South China Morning Post (SCMP) about the state of property market in Hong Kong. Here’s that article. Hong Kong is an advanced property market and usually, they will experience whatever is to happen first, way before Kuala Lumpur. According to the writer of the article, the Hong Kong property market has experienced a 9-year UP and no prices can keep rising forever. In December 2009, the International Monetary Fund has already warned of the potential risks from a dangerous bubble in the Hong Kong property market. The warning did not mean much as prices continued to rise and according to the Centa-City leading index of secondary market prices, the prices has hit a new high. It is now fully 124 percent above its level when the IMF first issued its bubble alert back in 2009. 9 years and 124 percent up.

Next would be examples of why things are really super overpriced. Luxury flats are now selling for HK$130,000 (RM68,000) per sq ft. Nope, not a typo. I repeat. RM68,000 per sq ft. As for affordability, Hong Kong people would have to make do with a flat as big as a parking space for a TESLA. Here’s that earlier article: Tesla versus micro-flat. Similar sized. This is not all because even the car park prices are becoming crazy. Here’s that earlier article too.  RM2.8 million for one parking spot! When we google for ‘coffin homes’ we would realise that there are so many people who could not afford even a decent place to stay and within the same place, there are people paying a few million for a car park. Unfortunately, the pace of development was too fast and many people just could not keep up.  So, do all these point to an upcoming property bubble bursting? Well, in order to answer that, the writer, Tom Holland pointed out two forces.

First one would be the influx of mainland China buyers. The second one would be the high liquidity in Hong Kong’s financial system due to the rock bottom mortgage rates. The mainland buyers are now accounting for about 10 percent of purchases in number and 15 percent in value. (Yes, this means that they are buying more expensive properties or they are simply paying more since they are trying to outbid the Hong Kong buyers)   10 percent is still a very high percentage and as of now, the sign points to a continuation of these purchases. Second, we look at the mortgage rates. It says that as recent as six months ago, interest rates for Hong Kong buyers were as low as1.75 percent. (YES, this is very low). However, that same mortgage rate would already be 2.12 percent. (Not that high, actually and should not be sinking too many people unless they are already overstretched currently)  If the gap between HongKong and US interest rates closes and if the US raises interest rates by 0.75 percentage points over the next 12 months, then interest rate on floating rate Hong Kong mortgages will climb to 3.4 per cent. This is almost double the number 6 months ago. So, is it considered a trouble yet?

For this, we need to understand about the Hong Kong borrowers. HKMA’s figures show that the average borrowers take out a mortgage for just half their property’s purchase price and less than 5 per cent getting top-up loans from developers. The writer goes on to show that assuming everything as per the numbers above, then a couple would have paid roughly HK$16,500 a month in mortgage costs 6 months ago. If the rates double then, they would be paying HK$19,800 within the next one year.  This is steep but according to the Census and Statistics Department of the Hong Kong government, the median monthly income for an “economically active” household living in private sector housing is HK$42,200. In percentage, the couple’s mortgage bill would have risen from 40 percent to 47 percent of their monthly income. In conclusion, this is definitely bearable. It means that the day for the property bubble to burst is not about to arrive anytime soon. It will come one day…. Here’s that full article again. 

What about Malaysia then? Well, first of all, Bank Negara Malaysia’s responsible lending advice to banks started a few years back, not this year. Secondly, banks themselves have been lending cautiously and in many cases would not even follow the listed prices from developers. Anyone buying the 3rd property onwards would have to have 30 percent downpayment which is an extremely high wall to climb. Investments from the Chinese (from China) are also increasing and I think the Chinese like Malaysia as a gateway to ASEAN and we have many advantages compared to all other ASEAN nations too. So, just like Hong Kong, these Chinese investments would help to push the economy along. Next would be the news about BNM potentially raising the rates in Q1 2018. Again, the percentage is going to be small and the increment to the mortgage bill is likely to be insignificant too. So, I think Hong Kong is a very good barometer and we should keep ourselves updated of what’s happening to their property market too. It can provide some clues on how we should also be looking at our property market. Some other clues? Here. property bubble bursting. Signs to look out for. Happy following.

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written on 10 Dec 2017

Next suggested article:  Bad news. Chinas credit rating cut because of ‘slowdown in economy.’

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