Friday 16 June 2017

Hong Kong resi - the real estate market which is closest to the source

Chinese credit creation/ capital flight has leaked out into prime real estate in many countries. Although in the west its being hit with taxes and Chinese capital account restrictions. Arguably places like London and perhaps the main Canadian cities are now in prime residential bear markets.

But inflation is strongest nearest the source. Seems on the surface that Hong Kong is still going strong:

But Chinas credit impulse is now negative and credit creation has to be better managed as part of the Chinese economic restructuring/ rebalancing.

So I dont see the outlook over say a 2-5 year view for Hong Kong resi being very good if things go well, and if there is some sort of crisis it will get destroyed.

This is what happened post 1997 with the Asian crisis and unification:

Basically property prices more or less went back to pre-1993 prices by 2003 (I dont have pre-93 prices but the Jan 93 index was 84 and the market bottomed out in the 60's). ie everyone who bought after 1993 was significantly underwater. If you bought near the peak you had a drawdown from 1997 through to the bottom in 2003 and it took until 2011 and a new Chinese credit bubble to get back to flat. The drawdown from the top in 1997 was 66%, even it you ignore the extremes, many people will have had 40-50% drawdowns.

10-20 years is a very long time in someones life cycle to wear negative equity. You have to wonder if they will just default instead which raises questions about the solvency of the Hong Kong banking system.

I have no idea when Hong Kong residential will blow up, but bubbles always pop and probably all it takes is one administrative decision to do it from here. China's credit bubble is unprecedented. The price action since 2015 also looks volatile and turning points are often associated with volatility, ie bull traps.


I thought I would look at rents, as in the end they underpin capital values. Rents also have fallen in downturns (post-97 and 2008), but capital values have massively outpaced rents in this cycle, further evidence of capital flight/ hoarding.


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