2 August 2019 - The question of timing in terms of investing in real estate is always worth asking, though the answer is often elusive. This is especially true in times of uncertainty – like the one Hong Kong is facing now.
The recent turmoil in Hong Kong – first sparked by political concerns and now developing into broader disruption – is difficult to assess in terms of risks to real estate. When the extradition bill and resulting protests first began, I posted an article discussing what negative consequences might ensue, together with my view of significant capital flight being highly unlikely. Since that article was written, there have been further incidences and a heightening of tension. But are these bad for property owners or investors?
Long term investing can be at odds with the property (or stock) market environment at that moment. A very strong property market can sometimes be driven by a healthy economy but can also be inflated by speculative sentiment without strong foundations.
In a falling market, the prevailing investment wisdom of “never catch a falling knife” directly contradicts with the equally well-quoted “buy when there’s blood in the streets” – words first coined by Baron Rothschild but used by investors worldwide including Warren Buffett and John Templeton.
Indeed, sometimes the best time to invest in a company, particularly one with sound fundamentals, is when it is suffering from “event risk” – a short term drop in the stock price driven by a dramatic event such as a prominent lawsuit, management scandal or product recall. Is this such a time for Hong Kong property, or is it a beginning of a more systemic problem?
As of the time of this writing, the latest available data on residential sales (number of transactions) from the Lands Registry showed 4,627 transactions in June this year - a 44% decline from May. The drop in purchases was consistent across the mass, mid-end and luxury markets.
Statistics like this – short term comparisons – can sound alarming and are too-often referenced as definitive indicators of the health of the property markets. But one should put it in perspective by looking at longer-term data. June sales were 4% below the 2018 average, and 4% below the average over the last 5 years.
That’s not to say that the market is isn’t uncertain. People are nervous at the moment, understandably so. The struggles that are unfolding could get worse, or they could have some resolution in the weeks and months ahead. Investors, particularly first-time purchasers, have slowed down and been more selective in recent weeks.
However, Hong Kong’s fundamentals have not changed materially in the past month, with the exception of a decline in consumer spending which needs to be watched over the next several months. The larger drivers of Hong Kong’s economy such as global financial markets confidence and interest rates have actually moved in favor of a brighter mid-term outlook for Hong Kong’s property prices.
Bloomberg published an insightful piece detailing the longstanding gap between supply and demand – a dynamic we have referenced repeatedly in our market commentary - and why this is likely to support long term growth in Hong Kong’s property markets despite the current protests and their near-term impact.
The bottom line is that real estate markets are driven by long term fundamentals, just as buying a property is a long term investment. If you are considering moving from renting to buying, it remains a good financial decision. As simple as it sounds, I recommend that if owning property is a goal, you continue to pursue it. Caution is always important in making large decisions and is especially so at the current time. If you find a great property that will bring financial security over time, the current volatility shouldn’t scare you into making a good decision for your future. Remember, people who were looking to buy 2, 3, 5 years ago but didn’t, have watched from the sidelines while the market’s appreciated. Our economic fundamentals haven’t changed substantially since then.
However, if an acquisition would represent a large percentage of your wealth, then I recommend reducing your risk. You can achieve this by either waiting for the societal tensions to be resolved (one way or the other), or still invest but make a smaller investment. Property ownership remains one of the best financial decisions people can make and the key indicators of income coverage, interest rates and financial sentiment (as seen in the equity markets as of the posting of this article) all remain solid.
If the disruption does indeed escalate to the point of materially hurting the economy, look out for opportunities. I believe it is likely to be temporary – event risk based on sentiment and fear. Markets and property prices can quickly recover after fear has passed, as we saw earlier this year but also in 2012 and 2016 when dramatic rebounds in prices and volumes followed prior declines. The underlying economy is what counts and the signs are still pointing in the right direction.