So you are considering whether to buy property in Hong Kong, but is now an attractive time to invest? We’ll explore the factors driving the market and provide you with the best information to base your decision on.
Let’s have a comprehensive look at:
1. The historical performance of property in Hong Kong, expert forecasts and whether it looks like a good time to buy, purely from a market standpoint.
2. A couple of real-life simulations and what they’d mean for your personal portfolio
3. Mortgages and Taxes
4. What this means for residents vs. investors
5. A glossary of useful terms
Buying property in Hong-Kong is not for the faint of heart.
According to the Centaline/TradingEconomics Index, Hong Kong property has been very much of a boom and bust market. In the decade to 1997, prices rose by 5x, promptly collapsing by over a third in less than a year and then suffering a long and gruelling bear market all the way to 2004, when they bottomed out at less than a third of their peak 1997 value.
Since then, and until mid-2015, property in Hong Kong followed China’s ascent and rose by an incredible 4x, reaching prices 40% above previous 1997 peaks, with only occasional and moderate lulls – during the global financial crisis and SARS epidemic, for instance. That’s over 15% per year purely in capital gains, without even factoring in rent. Wow!
But since Sept 2015, properties in Hong Kong have once again hit a blip and are down by a little under 10% in a year – a movement attributed to the weak economic data from China. Worryingly, transaction volume in January 2016 hit a 25-year low of only 3,000 units sold. Specialists usually see such drops in liquidity as a symptom of developers refusing to capitulate on prices, which cannot last forever, and signals further pain when they ultimately do.
According to Demographia, which compares house prices to incomes worldwide, those looking to buy property in Hong Kong face the least affordable market in the world by far, with an apartment costing 19 years of income as compared to Sydney at 12 and London and San-Francisco at 9.
Given the high prices and recent slowdown, some specialists have gone as far as to wager on a further 20% fall over the next year. Of course, Hong Kong property forecasters have been wrong more often as they are right. And with Hong Kong being a leading Asian business centre, and with the long-term demographics and growth rates of emerging Asian economies being more attractive than those of Europe, one can expect values to do better in the very long term, despite these near-term risks.
But even if, as the incorrigible bulls argue, this is just another lull – an opportunity to buy property in Hong Kong on the way up, it is very clear that this is a market with substantial volatility, unlike some other more stable prime property markets, which tend to behave much more like fixed income investments.
Unless you are very wealthy, to buy property in Hong Kong equals dramatic concentration of your personal portfolio.
Consider the following 3-bedroom flat in Mid-levels.
It has gross and net areas of 1,048 and 811 feet respectively. The asking price is HKD 14.8 million/ US$1.90m / £1.33 million which is eye-watering even before you add stamp duty (3.75% for a property of this value plus an extra 15% if you are not a permanent resident – PR), agent fees of 1% and legal fees of around HKD 15,000, totalling HKD15.5 million for a PR, or HKD 17.7 million for a non-PR.
Now, one of the most well-known rules of finance is that you should diversify your investments, and based on studies of the volatility and correlation of different investments, a pretty common rule of thumb is that, if at all possible, you should seek to have a portfolio of at least 10 different investments. So if we were to apply this rule, this Hong-Kong flat would only really be an appropriate investment for those with assets of over HKD 148 million (or US$19 / £13 million).
Of course, many people simply don’t have a net worth of over 10x a house price, and in those cases it sometimes still makes sense to risk that additional concentration to get on the property ladder and buy rather than rent – but that’s the case for someone with a HKD 600,000/ £50,000 income and HKD 600,000/ £50k savings pot looking to buy a £200k home in Birmingham, UK say. If you are in a position to consider buying eight-digit property in Hong Kong, you should really be looking at the security of your net worth as a whole.
Even a much more modest 280 / 217 (gross/net) square foot 1-bedroom flat in Sai Ying Pun is going for HKD4 million US$ 515,000 / £361,0000 thousand. For a property of this value, stamp duty is marginally lower at 2.25%, and if you are a PR, you’d also manage to get slightly better mortgage terms of 60-70% loan to value.
But realistically, even for the value of this starter property, you could buy property in other prime markets such as London, or even buy 2 or 3 different properties in secondary markets!
Mortgages and Taxes
We’ve mentioned the stamp-duty tax briefly above. Here’s a summary:
- The basic rate ranges from 1.5% for low-end properties to 4.25% for high end ones for first time buyers;
- There is a surcharge of 10-20% for sales within 3 years to discourage flipping;
- Non-residents or companies pay an extra 15%;
- Permanent residents who are buying a second property pay roughly double the basic rate.
When it comes to mortgages, if you earn your income in Hong-Kong, you are eligible for the Mortgage Insurance Program (MIP) which allows for a 90% loan-to-value (LTV) ratio for properties below HKD 4 million, such as the small one above, or 80% for other properties. Otherwise typical LTV ratios to buy property in Hong Kong are around 50-60%. Prime mortgage rates are around 5%, which means a real rate of 2.5-3%, with terms of usually 30 years. So all in all, mortgage terms are somewhat less attractive than in other prime markets due to high deposits required.
Buy Property Hong Kong – Conclusion
If you are a permanent resident of Hong Kong, both from a legal standpoint and in practice, then you need to have a home, have an investment horizon of many years, are not subject to punitive stamp duty and have access to reasonable mortgage financing. In that situation, buying Hong Kong property could make sense for you. With rental yields at around 3%, and without much room for further appreciation, that is the sort of return you could reasonably expect from your investment.
On the other hand, if you have an international perspective and are thinking whether to buy property in Hong Kong purely from an investment standpoint, it might make sense to consider other prime markets. Most have lower stamp duty, require lower mortgage deposits, are at more affordable price levels and are linked to less volatile economies.
In Asia, the Australian market is exposed to China also, of course, but has more attractive financing options. Germany and Spain offer attractive bargains, while the UK and the US have prime markets at comparable prices to Hong Kong as well as secondary markets at more attractive prices, all of them with much less exposure to China.
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Glossary of common terms and acronyms
- AVD – Ad Valorem Duty. These are the higher stamp-duty rates paid by non-first-time buyers
- BSD – Buyer Stamp Duty. This is the 15% stamp duty surcharge for non-permanent-residents.
- EAA – Estate Agents Authority. The regulatory body for agents. Established the Estate Agency Agreements which are standard templates for displaying information on properties and for purchase/lease agreements.
- Exclusive Rental. Means that management (staffing, rental, cleaning, etc.) fees and ‘government rates’ are payable by tenants – the default in HK.
- Government Rates – quarterly HK property taxes of 5.5% of ‘rateable value’ of the property.
- Government Rent – additional taxes of 3% of ‘rateable value’ that apply in some areas.
- HKPR (or just PR) – Permanent Residents, who are not liable for BSD. To be a HKPR, essentially you must have been born there, resided there continuously for 7 years, or have been a permanent resident before ’97. Typically, PRs will have a
- Permanent Identity Card (PIC).
- Rateable Value. The estimated rental value of the property, used for assessing taxes.