To Sell or Not To Sell....that is the question

I would like to solicit opinions from all of you.


We bought our first flat in Tung Chung 9 months ago for $2.1M ( 2 bedrooms) and occupied it ourselves. Since my wife is pregnant for the third time, we were entertaining the thought of moving into a big 3 BR/2BR flat in the same estate. We asked the agent/s about the prices of the properties now and they told us ( and we can confirm it in the latest transactions page of centaline website) that our present flat can be sold for about $3M to $3.1M.


Unfortunately, our target 3 bedroom flat upgrade will still be beyond our budget. The money which we will gain from the sale can only cover the downpayment, stamp duty, etc. for the purchase of a smaller 3BR/1BR flat, which in our opinion is not a very good upgrade from what we have now.


My question: is it wise to go ahead and sell it now, saved the bulk of the profit, rent temporarily and wait for the market to become buyer friendly again, and then buy? Or I am just creating a problem for ourselves if i go ahead with this?

Up to you. In my view, the best bet is probably to trade down to a tiny flat in a good school area like Mid-levels, Kowloon Tong or North Point.

Thank you Loyd and Walk-up for your thoughts.

walkup,


renting for a year does not mean eating a 250k loss. a portion of the monthly mortgage payment goes to pay interest, and the profit resulting from the sale will earn interest for the year (at least 5-6% can be expected, or around 50,000 to 60,000 per million dollars profit). that 250k figure needs to be offset by both the mortgage interest figure, and the earned interest from the invested profits.


for example, lets take the arbitrary figure of 20k for a property mortgage.


a 90% mortgage at 20k using prime minus 3.1 will be split roughly like this in the first few years: 7,400 to interest, 12,600 to principal. essentially, that 7,400 to interest is treated the same as the rental loss, since no equity is built. (of course there are different mortgage schemes with different rates, but just using these as reasonable examples).


If the OP were to sell his residence and go rent another property for 20k, in order to break even (ignoring appreciation) the interest from the invested profits must cover the 12,600/mo shortfall. Assuming a reasonable rate of return of 6%, the OP would need to earn 2.52 million in profit from the sale in order to fully cover the shortfall from renting a 20k property. (once again ignoring appreciation and costs associated with moving).


As for costs associated in moving, these are variable and can materially affect the net profit of the transaction. On a 2.1 million value property, closing costs are pretty low (in terms of stamp duty and agent commission), but nonetheless you would have to debit those fees. Also, it is unlikely the monthly mortgage payment will be the same as the monthly rental payment for a property of similar quality (the rental fee would probably be higher).


I do agree there is not much point in rebuying straight away unless you find an incredible deal, since most property values have risen in paralell with your own, thus cancelling out your profit.


whats important is the position you decide to take regarding the future of the property market. if you think the property market will correct sooner rather than later, then selling now would lock in your profit. if the market continues to rise, then the longer the rise continues, the higher the opportunity cost for selling now. if the market goes sideways for a while, then its generally slightly worse off to sell now since you bear the transaction costs and rental shortfall, but have no opportunity to rebuy.

Liebliaj, thanks for your insights.

hi walkup


i used the 5-6% interest figure based on corporate bond coupon rates of BBB or higher (investment grade) that are currently available in the market, which i consider moderate to low risk with a fixed income return.


as for whether or not the profit is "real" this is a separate issue from the example above. I would argue that the profit is no less "real" than if the OP decided not to sell his flat, just that the gain is unrealized. This applies to any investment class, not just property. It is the same as balancing a portfolio of stocks - selling the winners (thereby locking in profit), and buying a different investment with value prospects. whether or not money is made or lost on the new investment depends on a lot of factors, but the profit for the sale of the original transacation is considered locked in.


Obviously in the case of HK property, if all properties have risen together in concert, there would not be a value opportunity to rebuy within the short term. Therefore, if the OP decides to sell it makes sense to invest the profit in a different asset class for the time being until property once again offers a better value to price ratio.


Its worth noting that i do not really disagree with what you are saying, im simply clarifying the decision making process I would take if I were facing the scenario quoted by the OP.

Going forward on the future property ....... I doubt it will ever really dip a lot ...... at most sideways or slight dip ...... SIMPLY BECUZ BORROWING MONEY IS DIRT CHEAP NOW!!!! ....... its creating too much liquidity ........ The man on the street will never have any problem paying off monthly principal + interest ....... Unless interest starts to creep up to 4-5%, otherwise it will be a long time before we see a major correction.

If you only have 1 property to live in at any given time anywhere in the world, when you sell it and try to buy and move up, you never make any money because of the theory of "sell high and buy high" situation, unless you sell the property and pocket the money and run. Real estate prices now in HK are very high and nobody knows when the bubble will burst and based on experience in the past, when prices reached the extreme, it will bounce back. So the questions are what is the "extreme" and when will it happen?


Upgrading or moving up is always based on needs; affordability and availability. Based on your situation, you do have needs for a bigger flat but then at the same time, you have to consider if you can afford a bigger amount of mortgage, if you can not come up with the difference in cash and if there is anything available for your needs? But if there is nothing available based on your requirements and budget, it is better to stay put and stay where you are for the time being until such time you can find something you like to buy later. It is a bad idea to try to sell first and buy afterwards. You should try to do it the other way around. Please bear in mind, from a sales point of view, it is always easier to sell something smaller and less expensive. Speaking of the idea if you should sell now; put the money in the bank and rent and wait until the change of the market place in favour of the purchasers, it is also one of the options for you but then, you are also taking a chance that you may end up buying something even more expensive later, if prices keep going up. The little interests from the bank will never keep up with the inflation. The decision of buying or selling real estate is almost like when you are driving and you are not too sure if you can turn left or right, so, the best answer is either to stay put or just go straight. Don't make any turns. You already have a 2 bedroom home which is a dream to a lot of people in Hong Kong so, in my opinion, if I were you with a family, I would not make any major move at this time because of all the risks involved.

Wongjoseph,

Thank you. Your insights are spot on. Im so glad i posted this question here because with these kind of opinions, making a decision will become much easier. Again, thanks everyone.

I'm an expatriate real estate agent and here is my opinion, few options ahead of you :

1) stay in your existing Tung Chung unit if space / convinience allows it.

> holding a unit for self-use is always a win-win situation as you can live peacefully in your own place which you have renovated/designed hassle free without the need to relocate every 14 months or so, however if space is an issue and staying in what you have is not an option, then ...

2) sell the unit and rent a larger unit instead

> which I do not recommend as it's the exact opposite to whY I mentioned above, this is something you should consider only if you think you will relocate out of HK within a year, if so could be an option, otherwise, you'll just spend your profit on increasing rent rates, where the best option from my point of view is ...

3) sell the unit and buy a replacement nearby with a larger size.

> where at ? You are already in Tung Chung - so consider seriously Discovery Bay, an ideal environment for kids and a pleasant place to be at, 3 bedrooms unit can still be found around 3.8M/4.2M will be happy to meet and discuss further, message me if you if need any further advice, we could just meet for a friendly coffee in central in your free time along with your husband to see what works best for you.

Proves again don't ask a barber if you need a haircut.


Why not rent out current place and just rent something bigger. If you can't afford the sell/buy now you are unlikely to be better off for a few years after another child. Each buy and sell costs about 10%, so $400k. Keep that in mind. That's the difference in rent for many years. Lower your risk, don't raise it. Stay put or rent/rent, but don't sell as you are 2/3 of the way to what you want, wait for circumstances to change so you can move up with lower risk. Look at the rental on this site to get an idea of what is out there. But if you can't aford it, well, you can't afford it, sorry.

Thank you Zukerman and hkxxxpat for your comments. As of today, we are leaning on keeping our flat. After reading all your views, I think this is the right thing to do.

Talk to the bank and take out as much cash as you can by remodelling your mortgage. Use the cash to purchase the flat next door and break two units into one or let the one you just purchased until the time is right to combine the units.


You dont sell so you dont loose the selling costs and a combined unit is of greater value for sale or for rent later.

I would sell personally, and negotiate with a landlord at Tung Chung to have a shorter Fixed term lease, you don't have to pay a higher price per month if you shop around.

That way when the Market cools off a bit you can buy again.when the bubble bursts it will fall quickly and owners will be trying to all sell for what they can get before it drops completely.

I read today's news from Singtao Newspaper in Hong Kong that, as a result of the crisis in Japan and the plunge of the local and worldwide stock markets, some owners in some apartment complexes in Hong Kong have already reduced their asking prices between 2 to 10% to sell. The article is in Chinese but you can take a look at it and have somebody you know to translate it into English for you: http://www.singtao.com/yesterday/pro/0316ho01.html


Imagine for 10% decrease in price of a home of 10 millions, it would be a loss of 1 million to any potential sellers between now and few days ago before the crisis. This amount is a life time saving to a lot of people.


I don't know if it is a good news or bad news to the Hong Kong real estate market but at least for now, it is good for the buyers because now they have a chance to negotiate the prices and terms with the one time "tough-to-deal-with" owners but I have no idea how long this trend will last and to what extent? The fact of the matter is some banks in Hong Kong have already raised their mortgage and other lending rates.


Is it about time the burst of the bubble?

if we look at history, bubbles usually occur when buyers extend too much in their mortgage payment. the last bubble in 97 where buyers borrowed up to 90%-120% of their income and the bubble in the US where the banks didn't even check your credit score.


currently in hong kong buyers can only borrow up to 50% of their income and right now buyers are only using roughly 45% of their income for mortgage payment so IMHO there is no bubble risk yet in hong kong.


having said that i also dont think prices will keep going up that much.