Are Properties in HK 50 Per Cent Overvalued?

Hi,


According to an article in Economist, HK properties are 50% overvalued. See link below:


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I am hoping to buy an appartment in HK instead of renting but this kind of news really make me think carefully!


However, many people here are overly optimistic about future property prices because of limited supply. Anybody planning to make buy an appartment despite prices have increased so much since 2009? I would love to hear your views.


David

Hi dkyeung,

I think the article refers to the price to rent ratio being over valued by 50% not the actual housing prices.

Property is valued basis, supply/demand, general economic conditions of a country, location of the property, political stability, legal system, general perception of the population and yes the rental return. However, the rental return is just one of many components of calculating a property value and by no means the main one.

I guess one could say even if the return is low, the bank will pay even less interest for the immediate future, stock market is very volatile etc...

I would say Hong Kong is all about supply and demand, the other issue for Hong Kong is that as the mainland Chinese grow economically, we will see a greater middle class there and even if only 20% of Hong Kong property sales are purchased by the mainland that is adding fuel to the fire.

I can't answer a question as to whether you should buy as it all depends on your own needs/requirements/financial situation, I would say do a calculation of the rent you would pay or the mortgage repayments, do you really like the place you are thinking of buying, but try and leave the whole will my property appreciate or not arguement out of it, as it will drive you crazy!

Also you have to consider the relative income tax rates in the country of residence. If you look at the US you would think house prices are cheap relative to HK, but then you are paying close to 50% (in case states even more) on personal income tax, whereas in HK you are paying 15% max as taxes. And HK$ is pegged to the US$ so the differential is almost automatically adjusted in property prices and rentals. In HK the true measure of property is in rental yields and interest rates. Again HK interest rates are also largely pegged to the US$. Interest rates are at their all time lows globally, therefore mortgage rates are also low relative to historical patterns. And unlike the US, the HK property market since 1997 has become a lot more conservative ie down payments demanded by banks are now up 30 and in some high end cases 40%, so yes if u compare to the US then HK absolute house prices look high. Reading that table it looks to me like the Aussie market is where house prices are probably the most expensive. On a tax adjusted basis, HK is closer in line with global average (maybe a bit high but thats due to its small size and relatively safer living standards. The decision to buy or rent basically depends on where rental yields are at the time of decision making. Look at the maximum monthly outflow you can bear, look at the yields prevailing in the market when u need to make the decision. Yields closer to 6% you should buy and yeilds closer to 3% you are better off renting. It is a pure financial transaction based on interest rates and yield thats all. Unless you plan to make HK long term in which case there is no choice of decision.

The Economist is using the price-to-rents gauge. This is normally a good meaure but at the moment buyers are being squeezed by owners who don't need to sell. Inflation and the economic recovery has not yet had time to hit rents.