24 November 2016 - Property value is subject to degrees of uncertainty. Influenced by global market headwinds, Hong Kong is not exempt from a real impact in property prices driven by political and economic conditions abroad. That being said, after taking global macroeconomic trends into account, those deciding upon the Hong Kong property market as a potential investment venture can make an informed decision by looking to the costs associated with buying as opposed to renting.
General Market Outlook
According to Hong Kong’s Rating and Valuation Department (RVD), speculation over the timing of the Federal Reserve’s interest rate hike, the introduction of government mortgage tightening measures in 2015 and a general slowdown of the Mainland Chinese economy placed a downward price pressure on the local property market. By the end of 2015, domestic property sales as a whole dropped for the first time (by 12% YoY) since 2002.
Looking forward, concerns over a possible US interest rate hike remain whereas the supply for private housing is projected by the Hong Kong government to amount to 18,000 flats in 2016-17. Despite a projected increase in housing supply, according to UBS, Hong Kong is still firmly within bubble risk territory due to the rapid increase of real estate prices up until mid-2015 and the stagnation of real incomes which contributed to an eventual dip in demand in early 2016.
Looking to government data, Hong Kong’s home prices did in fact contract by 7% in Q1 2016, however in the last 5 months they have rebounded by 6%. Collier’s International forecasts home prices to fall by at least 10% in 2016 with the caveat that luxury properties will largely remain unaffected whereas the investment bank Macquarie contravenes this by predicting an ongoing recovery of house prices.
Interest rates and market conditions aside, with the corresponding fluctuation of the rental price index, the decision to invest in Hong Kong real estate could rest upon the age old argument of buying vs renting.
In terms of evaluating this decision, several factors come to mind namely: the purchase price of your property, required down payment, interest rate (fixed rate or flexible rate), principal amortization (period of mortgage repayment in years), property tax rate/ stamp duty, income tax rate, annual maintenance fees, and your monthly mortgage payment. This can then be offset against the costs of renting a similar home and your annual return on cash after tax.
Though you will have to factor in a number of assumptions which include the interest rate and general inflation, by weighing up the expected returns on both buying and renting, you will be able to take your personal income into context as to whether the income received from tax deductions resultant from mortgage repayments, the sale of real estate and received rental income outweighs the invested income streams leftover from renting which would have otherwise contributed to the down payment and mortgage repayments.
Referencing the RVD figures and the Global Property Guide, the house price index rose by 416% from Q2 2003 to Q3 2015 followed by a corresponding 146% increase in the rental index. Dependent upon your intent for investing in the Hong Kong property market and your desired income outcomes, you can objectively assess your expected returns in either buying or renting real estate in Hong Kong.