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Hong Kong – A Tale of Two Markets

When it comes to Hong Kong’s residential real estate market there is definitely a Tale of Two Markets – the First-Hand Residential Sales Market vs. the Second-Hand Sales Market.  For those of you not familiar with the terms, First-Hand market is the new development / off-plan market, and the Second-Hand market is the resale market.

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If you follow the hype in the news, the First-Hand Residential Sales market is moving fast in 2017. Developers are launching development after development of new projects with small apartments and nano flats (150 sqft – 350sqft), with pricing anywhere from HKD 12,000 psf to HKD 30,000 psf+ in the main sectors.  Thousands of people are queuing to register interest and buy the apartments.  This market is buoyant because: 1) Demand in HK exceeds Supply 2) The total lump sum (HKD 3m-HKD 12m), while high, is by Hong Kong standards, somewhat slightly more attainable 3) For properties under HKD 5m buyers can still get a decent mortgage 4) For those properties priced higher, some developers are offering top-up mortgages / developer financing so as to reduce the downpayment requirement from the buyers and off-set the HKMA Mortgage caps. 5) Interest rates remain very low.

Let’s switch to the Second-Hand market where transactions are slow. This market is pretty stagnant. Why you ask?  Well, prices are high and many owners have no reason or real incentive to sell. If they do, it will be hard to buy back something similar at the the moment. However, the reasons go slightly deeper.  For example, to buy a HKD 10m apartment in the Second-Hand market a buyer may need well over HKD 5m (50%) in downpayment alone plus costs to complete the purchase, due to the tight mortgage cap rules in HK.  For the equivalent property in a new development, including development finance, the buyer may only have to put HKD 2m.  So the crowds will migrate to the market they can afford.  The Government’s regulations have really created a two-tier property market with their mortgage cap regulations and their Stamp Duty regulations.  Say for example you’re a young couple with your own home, and now you want to upgrade for all the right reasons (have a family, have more space etc etc).  If you buy another property, you have 6-12 months to resell your current home, or risk facing the higher rate of stamp duty for owning 2 properties (which can be up to 15% for permanent resident or up to 30% for a non-permanent resident).  If you buy a new development property you are coming into where demand is strongest (in certain sectors) and while paying a high price on a psf (per square foot) basis you may only need to put down 20% (including mortgage and developer finance) but at the same time you have sell your second-hand property in a market where your buyer pool is limited to 50% mortgage. So it’s not an even playing field.  While the HK market is fairly liquid, as you approach your stamp duty deadline, you could be forced to take a hit on your property sales price just to avoid paying the higher rate of Stamp Duty.  The HK Government is looking into this as to how to extend this timeframe for people who genuinely wish to move/upgrade home, but it does present a market problem, or perhaps a market opportunity.

Either way, Hong Kong’s residential market is a Tale of Two Markets at the moment, and to the majority of the population, the prices are too high to actually jump on the ladder.  Affordability remains a key issues.   But those who watch closely will definitely find pockets of opportunities.

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