leviathan

From afar it looks like the latest property cooling measures will take some of the heat out of the smaller flat market and probably lead to a further stand off between buyers and sellers more generally in the secondary market. I expect Centalline to tick down slightly say around 3-5% over the next few months while we await the first US IR rise in the Summer. How have the measures been received in by the press and market commentators in Hong Kong? Lev

Thanks for the detailed reply Dr B. Agreed on negotiating approach - request purchaser to view and make an offer is sound then once offer received you can counter offer if within a potential closing range. I suspect most purchasers do expect to conclude at close to bank valuation - and only move above this when the market is moving up quickly and they get scared they will have to pay more if they miss out on the property. As for asking price I note a number on the market now at around 5-10% above bank valuation. My own experience is Bank of China valuation is typically the highest, HSBC in the middle and Hange Seng lowest but this may vary by block. In my block BoCh is 200k higher than HSBC valuation. As to your specific challenge re bank valuation not reflecting view/ceiling I would expect either that eventually someone will recognise the additional value or just as likely if the market takes off towards the expected top then someone will pay a higher price anyway through exuberance.

Interesting anecdotals Dr B. Out of curiousity when you advertise a flat for sale do you consider the bank valuation (and if so which one Bank of China, Hang Seng or HSBC) as a good proxy for the asking price? If the market is entering an exuberance phase maybe xxx Bank valuation plus 5-10% would be a good asking price for the property?

UK (excluding London) has now definitively bottomed and Hong Kong is in the very last leg up into a blow off top like the UK in 2007 prior to the inevitable crash and 4 years of real price falls. Look at the 18 month of price uncertainty in UK 2004-2005 and the final blow off top in 2007 and compare to now in HK where 18 months of sideways price action (start 2013 to mid 2014) is now being resolved to the upside. If it follows UK pattern then 18 final months of rapidly accelerating price increases to sometime in 2015-2016 and will be followed by crash and 4 years of real house price corrections.

http://www.housepricecrash.co.uk/graphs/generated/homepage.png

Every Picture Tells a Story – Hong Kong and UK House Prices Different markets same 18 year house price cycle – 9 years apart? Hong Kong Centaline Price Index http://hk.centadata.com/cci/images/ccli_chart.png Nationwide UK House Price Index Not sure if the charts come out ok

Another good call Dr B judging by today's rises in the developers share prices. Can I ask was your call meditated mainly by the extent of short positions in the market or are you picking up anthing about the HK housing market in general - for example regarding the likely direction of policy? Lev

Yes previous support seems to have now become resistance following the fall to US$1530 and rally from. Deleveraging and margin hikes seem to have played their part. I now expect gold to trades sideways to slightly down this period of deleveraging with important support at 200MA.

Just wondering if we were close to the bottom in silver today? Peak to trough falls from March to October 2008 were about 55%. Peak to trough April to Sept 2011 have so far been 48% as the market factors in margin increases, and worries about hedge fund and bank busts and anticipates a bout of deflation. Perhaps Bubb and RH who have been anticipating falls to somewhere around 25 and 27 have called the bottom and the 300 Day Moving Average will mark the best buying opportunity? http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011/09/20110926_GREECE%20chart.png If I was betting on one of the 5 outcomes in the Greek flow chart link it would be moral hazard as leaders often choose the short term path of least resistance. This is probably the most favourable outcome for the silver price in the next few weeks - otherwise the other options may imply further price weakness while fear rules the market. Paradoxically this fear may prove good news for the gold price. Lev

Lots of negatives around at the moment for HK property - most notably the IR rises, increasing land supply, developer's sales prices for new units and macro economic picture. I think we are due a HK policy announcement in mid October as part of the Chief Executive's address which will confirm which direction housing policy will now take. Given the recent cooling of the market I wonder whether the govt will take a back seat now with regard to any further cooling measures or even relax any of the measures to kick start the market again? In the absence of this it is difficult to see the market avoiding the duldrums for the rest of the year? I certainly don't think the govt will want to be seen as bringing down the market.

Likewise I loaded up on Tuesday as it approached the 144 day MA. Was hoping to get it lower but satisfied so far. If it goes to 1.4 or 1.5 times the MA we would be talking about a $48 or $50 target. We might get this on the back of QE3 speculation but downside risks will hopefully stop at this MA so feels like a safeish punt. Famous last words with silver

No fraid not

Well I guess that's the risk a^K - copper has been falling steadily to below 144 and other importnat MA's but if we get a short term bounce from the current oversold conditions then the play should still work as a short term trade. Copper picking up today though.

Silver touched 34.30 earlier. 144 day moving average is at 33.71. Must be a good probability of it bouncing off this in the next day or two. Might have a small punt at silver long.

I meant to add affordability is very stretched now a yield compression from 3% to 2.5% implies a further 15% increase or so in prices from here. That's how I call it. In 2007 I was lucky to sell an investment property in the spring in London. I did as yellow tip put it on around 10% above market prices and within 2 months the prices had risen and we were able to get full asking. Three months later Northern Rock happened and the market went into reverse. Unless rents can continue their rise I can't see how prices can keep going much longer and rents themselves must surely be capped by reference to salary increases and general affordability?

Interesting to look at these two pictures side by side. I'm a long distance HK property owner with a luxury investment property on the island in mid levels near the new Azure building on Seymour Road. I post from time to time and follow this thread and the thread on Hong Kong Asia expat. I'm trying to hold my nerve and not sell atm like yellow tip as I also bought in 2008 and am sitting on a similar profit percentage 2/3's geared so in excess of a 150% return on equity. My target is to sell in 2012 but am aware property can correct very quickly and wipe out any theoretical equity gain in a matter of weeks. My personal target on the Centaline idex is 113 we are at 99 now so another 15% or so up from here. Having studied Harrison and others there does appear to be a final blow off top winner's curse phase which to my mind we entered at the start of 2011 as much of the 2009 -10 rise was correcting the mid cycle correction of 2008. The current land sale prices fit with Harrison's theory that land is scarce and hoarded and rises before property and as land increases in value it is demanded by banks as collateral which in turn enables banks to lend more against it. At the end in winner's curse land increases almost vertically. Is this not we are seeing reflected in the premium of primary prices sought over secondary market values and the land auction results. Harrison then desrcibes prices being tipped over by Interest Rates being increased causing loan defaults. This is where the HK market is hardest to call. Because HK govt has intervened in the market through imposing a tax on short term sales thereby reducing speculator purchases and demanding higher loan to values we have fewer speculators who might otherwise be unable to pay higher loan rates. We also have slowly rising HK mortgage rates but no evidence of rising US IR's with employment and housing trending down again in the US. Given this I think we may end up with a longer term cycle in HK than would otherwise be the case and adequate profits secured for the developers in the meantime. Key risk is China not the US in my opinion then. FInal issue I think is what are you going to do with the money if you sell. As an investor I would be looking to hold in a mix of gold and cash until I could identify something better to do with the money. I would not buy back in to HK property as either the market ends up crashing and therefore you are looking at a long period to make your next profit by investing or its still rising in which case you are chasing the market up further. Those two charts side by side say we are at the greed stage to me and some more inflationary policies in US and/or China will take prices higher still and yields into the impossible area of 2.5% or possibly even lower. At the moment my yield is 3% and that is with a 20% increase in my tenant's rent earlier this year. I

From the Standard I've read the Standard article and some are sceptical about the supply of 30-40,000 flats this year. Patrick Chow Moon-kit, head of research at Ricacorp, said the government is overly optimistic in its ability to facilitate the construction of 30,000 to 40,000 flats annually. He predicts no more than 15,000 will be put on the market each year. "To effectively improve the market, the government should regain its activeness when it comes to land supply," said Eddie Hui Chi-man, deputy director of the Research Centre for Construction and Real Estate Economics at Hong Kong Polytechnic University. "Control of land sales is mostly in the hands of developers." Hui added that in the short run, he doesn't see more property measures in place. Meanwhile, after the budget announcement three new projects were launched with prices at least 20 percent higher than prevailing market prices."" Looks to me like the developers are playing ball but I'm not convinced this will add luxury or larger units in any great numbers as quick as people say. Developer shares have reacted reasonably well to the news so I think this might be the end of their falls if the wider market stabilises. I guess a correction before a final top is then more likely in the hands of US interest rates and fear of rates rises could be the trigger for falls but given where I think the US economy/housing market is I'm sticking with my plan for 2011.

I agree surfdude that a correction is possible - but I think we are more likely to see a top once a combination of additional supply and higher interest rates hits the markets - this in turn may make banks reduce liquidity in the market. Trouble is with the state of the US banks/property market where will higher rates come from? US is exporting inflation to cope with its own highly deflationary property market. When US property market finds a bottom I think we will see rates gradually rise. Case Shiller seems to be pointing to a double dip in nearly all US markets and it looks to me like another year or so of price falls before we find that bottom. I'm sure the logic is that bubbles deflate back to the time point that prices start to rise strongly outside of norms - say 1997 or 1998 - and nationally the market is only back to Feb 02 prices. This implies a weaker US$ which itself will help HK property. China is the unknown to me in this mix - and maybe inflation here will keep the pressure on rates and bank liquidity although equally it could make HK more attractive vis a vie the domestice market. I'm agreeing a one year lease on my soho place so I can market for sale in early/mid 2012 which should be ahead of US IR rises but also timed to coincide with the new Azure opening on Seymour Road which should help the local secondary market. If we hit a further rise of 25% this year I will sell with lease or buy the tenant out. Lev

It will be intreresting to see the effect of today's Donald Tsang announcement on HK property shares and property prices. On one level it looks like a green light for higher apartment prices as adjusting land supply is really a mid term solution to controlling prices and other shorter term measures such as CGT seem to have been shied away from. However, I cant help thinking that when a market looks strongly bullish mr market will intervene at some point. Another outcome may be that Donald Tsang will introduce some further cooling measures to catch the market off guard. As for builder shares I expect a further sell off tomorrow but then a recovery - as I think much of the recent sell offs in the like of Cheung Kong and Henderson Land have been in anticipation of the 23 Feb announcement. So I intend to top up on developers and property remains a hold for now particularly with rents chasing prices up atm. 4 more years to the top if the 18 year cycle holds although the way we are going I think we may get there sooner in HK given US interest rates seem to be staying down for a further period yet. Lev

I thought hard about selling in 2010 and was quoted good asking price with or without lease. I keep a cash/liquid asset contingency available should I need to pay some/more of the mortgage off in a hurry with a large hike in IR's - an increase in IR's of 2% I would probably live with without adjusting the debt size. The other option I have is to switch currencies on the mortgage - currently in HK$ to help manage risk. Not sure what I would switch into though? Have dabbled with shorts but timing has to be v. good IMO to protect a large asset position. Nonetheless if the market rose another 15-20% in two years I would take a profit as the risk reward would not look as attractive even if it meant missing a final surge in prices.

Bubb et al Interested in any views on HK market. It does appear that cooling measures are now starting to bite - whether this is just taking 5-10% of the froth off the market or is a more significant correction it is hard to tell. Also how long the govt will be prepared to keep measures in place if the market rolls over or just stagnates - no doubt the agents, developers and lenders will be lobbying hard for less regulation. I've had the same tenant for 2.5 years in mid levels and am likely to extend his tenancy for another two years to take it through until early 2013. As a believer in the various studies into the 18 year property cycle I would like to think HK cycle correction in 2008 was the mid cycle correction and we now have 7 years from then into a top in the next 3 or 4 years. We also have a new development being commissioned in Seymour Road in 2012 which can give a boost to prices in the immediate vicinity. Key risk remains interest rates and how quickly they are to rise and whether IR increases will signal the top. I note that Russell Napier of CLSA is bullish about Hang Seng going to 29,000 next year and feels that IR's wont rise and the the stock market wont reverse to correct until US inflation at 4% the 10 year treasury yield is at 5.5% and chinese inflation is approaching 10%. I take this as a proxy for the HK property market as without a major correction you should still have credit growth in HK and China finding its way into the property market. I'm not sure I can see what will lead us into Tom Harrison's two years winners curse phase of rapid rise followed by sharp downturn though although I think its possible that a reversal of the current cooling measures, cutbacks in provision of new capacity, allied to some further credit growth in China combined might lead the market to the final top? Having witnessed the last three tops in the UK - 1972, 1988 and 2007 surely HK must have a final manic phase where prices rise quickly and then crash. The market rise in HK this year pre cooling has been about 15% - in the UK in each of those dates the prices rose 25-30% before rolling over and falling back and the last few years were not preceeded by a mid cycle crash like 2008. Hope I'm calling this correctly as with a geared asset profits come and go pretty quickly even with a stable cashflow but the one thing I've learnt is there are no absolutes or certainties in HK property market. Lev

Have recently been looking at some below market value property in the USA. Admittedly the location would equate to a depressed and oversupplied Northern town than to London per se but the crash has gone a lot lot further and gross yields in the 25-40% range are not uncommon. I dont think we will get to that position in the UK but at the moment the property bulls are salivating at gross yields between 8-12% in cities like Manchester. If we follow the American model we could be talking 20-25% yields and a further 50% reduction in price from here at least in equivalent towns. I doubt that can be achieved without Sterling interest rate rises but it has been in parts of the USA with LTV slipping to 60% and below. So I think in answer - we are ex UK property owners and landlords who still own property in America and Asia but not the UK so we are not bearish by nature - the downside risks in property ownership in the UK still outweigh the benefits. I had expected the UK market would be 30% plus down from the 2007 highs by now but the crash needs another leg down and the stimulus must be either IR rises, more job losses (perhaps a real cull of public sector jobs) and ever tightening credit - all of which lead to over supply of property and advance the rate of foreclosure. If people think we have bottomed then they must ask themselves how quickly will property prices and rents will rise from here and how they would sit if - base of 5% plus bank margin of 3% were to become the norm. My proposition is the downside risks outweigh the upside benefits and the risk reward does not favour a purchase. However a further 15% down from here and I think the risk reward is much more evenly balanced particularly to the long term investor/owner occupier. Then you only have to estimate the overshoot - and I now think parts of the US market are in overshoot territory. Why shouldn't overshoot come to the UK too - the govt can't bail everybody out - or at least you would think the next govt would take some unpopular decisions early in the term that will complete the crash. You certainly wouldn't want to delay it another two to three years and have people see their policies as the cause of others misfortune.

Dr B Any thoughts on what happens to Sterling when the dead cat bounce comes to an end. Will the interest rate rises you talk about prop sterling up or do you expect a hastening of its fall vs US$ and Euro? Lev