Hong Kong GDP per capita
As early as 2009, commentators have been asking whether Hong Kong property is a bubble. Since then, the debate has continued as, apart from a brief pause in the second half of 2011, prices have continued to climb inexorably upwards; despite efforts by the Hong Kong government to cool the market. Prices have more than doubled from their recent low point at the end of 2008. In fact, for most people, whether or not the property market is a bubble is not in doubt. The question now being asked is when the bubble will burst.
In a series of posts, I plan to take a detailed look at the Hong Kong property market, to try to assess whether it is overvalued and, if so, by roughly how much. I will primarily focus on the residential property market. Specifically, this is relevant to my investment Henderson Land (12:HK) and potentially other future investments. In this first post, I will look at the background and, in particular, how prices compare to historical trends. In subsequent posts, I will look in more detail at the reasons for the recent run-up in prices and current valuations.
Just looking at Chart 1, it is easy to conclude that Hong Kong property must be a bubble, however you choose to define it. Prices recovered quickly after the financial crisis and have more than doubled since then. Looking a bit further back, prices have increased by around 300% since their cyclical low point in the middle of 2003, during the SARS outbreak. Longer term, the market has been a real rollercoaster ride: property prices increased strongly from the mid-1980s up to the previous peak in 1997, before falling almost continuously for a six-year period following the Asian financial crisis, losing two-thirds of their value. After 1997, Hong Kong suffered five years of deflation, when consumer prices fell by around 16% in total.
One thing is clear, however: if Hong Kong property is a bubble, it is not just confined to the residential market. Prices of both office and retail property have risen even faster than residential property (see Chart 2), increasing by more than 500% over the last decade, and the rental yield in all three markets is now below 3%. This makes it hard to argue that the recent run-up in prices is solely due to buyers’ irrationality, given that investors in commercial property would perhaps be expected to take a more value-orientated approach.