The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Albatross on September 05, 2016, 09:17:08 PM
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Basic info: I live in Hong Kong. 29 Y/O. I suspect I'll get married within the next 2 years and want a place of my own. In USD, I've saved $290k (I sold almost all my investments in anticipation of buying, but still hold 45k in Vanguard Eur and APAC). I now earn $124k/yr. I save approx 63% ($78k).
Problem: Property prices here have almost tripled since 2009. Minimum down payments must be at least 40% (50% for properties worth over USD900k).For what is now deemed 'decent sized' at 500sq feet (insert sad laughter), on average one forks out the equivalent of USD840k. That is $1680/sq foot. It is also insane.
The property market increase has mostly been blamed on wealthy Mainland Chinese who park their money here, but recently, the buyers are mostly local Hong Kongers who have been waiting for the market to drop, but it has not. This means many locals are 'panic' buying, logic being that if you don't get in now you'll never get it.
Question: would you buy into such an expensive market? This is in many ways a market timing issue - but more fundamentally I look around and see many people unable to afford properties (except lots of local kids are getting their rich parents to pay for the down payments!). I am a relatively high earner here, with doctors, lawyers and other professionals really struggling to even save for a down-payment - would others see this as a warning sign?
I am struggling because time is running out before I have to consider renting or buying my own place (I currently live at home but would not want to stay at home after marriage).
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Are rent prices increasing at a corresponding rate? If so, that's unsustainable and I would expect a bubble to burst.
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No, not for 500 square feet.
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Are rent prices increasing at a corresponding rate? If so, that's unsustainable and I would expect a bubble to burst.
Thanks for responding JLee - yes rent has gone up, but the yield is now apparently decreasing. Used to be around 4.5%, now at approx. 2.5%. There are an increasing number of empty commercial shops with temporary lessees in the streets. Most people do not want to lower their asking price or rent because they already paid so much for the property.
Because of the Double Stamp Duty and high down payment requirement there is no bubble bursting in sight - even if there is a bubble.
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How much is it to rent a 500sq ft place that you would otherwise purchase for $840k?
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Approximately USD2,600/mth. In any event, not really considering renting as I could technically live at home (even newlywed, asian families and all that) but I would strongly prefer to move out.
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Approximately USD2,600/mth. In any event, not really considering renting as I could technically live at home (even newlywed, asian families and all that) but I would strongly prefer to move out.
The fact that you could live much cheaper or free at home is irrelevant...that doesn't mean that you should necessarily buy. The question is whether:
- You'll stay there (or HK in general) long enough to realize any savings from buying. Rent is cheap in comparison to buying so it's going to take a while to break-even
- 500sqft is really going to be enough long term (you're just now getting married)
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Talk to lhamo. Seriously. Ping her. The great and wonderful lhamo has useful knowledge on this topic.
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Thanks for replying undercover - just want to understand how I wouldn't make savings from buying (assuming house prices don't drop)? I pretty much always thought buying was a better deal in the long term:
Rent = $2,600/mth sunk to landlord; whereas
Interest on mortgage assuming 40% downpayment = $840k x 60% x (HIBOR@1.25%+1.4%) = $1,100/mth sunk to the bank (I realise does not include land tax and premiums, upkeep expenses etc)
As to whether I'll stay in HK - I don't know. If I move abroad I suspect I'd just rent the place out, or if the price went up I'd consider selling.
I think my family could put up with 500sq ft for the next 10-15 years (i.e. when I and gf/wife are still working), but would probably look to move out to cheaper locations away from the city with more space when I FIRE (or move abroad).
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http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0
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Thanks for replying undercover - just want to understand how I wouldn't make savings from buying (assuming house prices don't drop)?
Well that's the (literally) million-dollar assumption, now isn't it?
I would not buy into a bubble hoping that it will never pop (or hoping to sell before it does). If you don't mind your $840k apartment suddenly becoming worth $420k, have at it.
(Of course, what do I know? In Atlanta, I bought a house a mere four miles from downtown that is detached with a yard and cost $77/ft2, so I think all you HCOL people are utterly crazy to begin with.)
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I think you'd still be better served by renting.
On the math side, you also need to keep in mind the opportunity cost of having your money tied up in equity. $840k * 40% = $336k just to start off. At 7% returns, that $336k would yield more than $23k/year in returns. Which is more than enough to cover the difference in rent vs mortgage.
You mentioned that you'd sink $1,100/mo into interest. How much are the taxes/fees/upkeep/insurance? Those really can't be ignored, and they tilt the scales even further in favor of renting.
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Thanks for replying undercover - just want to understand how I wouldn't make savings from buying (assuming house prices don't drop)? I pretty much always thought buying was a better deal in the long term:
Rent = $2,600/mth sunk to landlord; whereas
Interest on mortgage assuming 40% downpayment = $840k x 60% x (HIBOR@1.25%+1.4%) = $1,100/mth sunk to the bank (I realise does not include land tax and premiums, upkeep expenses etc)
As to whether I'll stay in HK - I don't know. If I move abroad I suspect I'd just rent the place out, or if the price went up I'd consider selling.
I think my family could put up with 500sq ft for the next 10-15 years (i.e. when I and gf/wife are still working), but would probably look to move out to cheaper locations away from the city with more space when I FIRE (or move abroad).
I think you'd still be better served by renting.
On the math side, you also need to keep in mind the opportunity cost of having your money tied up in equity. $840k * 40% = $336k just to start off. At 7% returns, that $336k would yield more than $23k/year in returns. Which is more than enough to cover the difference in rent vs mortgage.
You mentioned that you'd sink $1,100/mo into interest. How much are the taxes/fees/upkeep/insurance? Those really can't be ignored, and they tilt the scales even further in favor of renting.
Another one to consider is transaction cost - I have no idea how things work in HK but in most of the US the cost of selling/buying is around 5% of the purchase of the property. Obviously this is less of a big deal the longer you spend in the home, but that's another ~$40K it would cost you to own the home vs. renting - if you stay 10 years that's another $350 a month.
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You're also tying up ~$340k in the down payment that could otherwise be invested. That is a significant cost. At a 5% theoretical investment yield, that's another $17k/yr, or $1,400/month right there. Sure, the value of the property could go up too, but this sounds like an unsustainable bubble that's going to pop eventually (when, not if) and you could get royally screwed.
I'd rent. $2,600/mo sounds like a bargain in that madness of a market.
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Count your lucky stars. Your colleagues who are not Hong Kong residents will pay 15% more for the same property because your government decided to charge 15% sales tax on properties purchases by non permanent resident (nevermind they have been working a steady job in Hong Kong for years and paying income tax...)
So you get no sympathy from me. If you don't like the price move away. I saw the light and left that money grabbing ultra consumer sukka place....
Okay, it gets worse. The rate is 15% of the higher of purchase price or fair market value determined by tax authority. Great you found a nice property for 50% off because it needs major work but thank you for your contribution of 15% of the entire 100% of the property value because we say so...
Slightly more helpful advice: live in village housing, go north to New Territory, live with your parents.
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Get married then decide.
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Wait until you're sure that you're going to stay put. If you might move or might decide something else due to possibly getting married, or life changes then wait.
it sounds like the market is pricing out a lot of people. it may be bubbling which could put a lot of your money at risk
i'm not sure what the process is there, but here there are legal fees, transfer taxes, and real estate agents to pay when you sell a property. this takes away sometimes significant chunks of your selling price.
Also, have you considered in property taxes, and other maintenance fees other than just the price of the property? I can't imagine what the taxes might be on that big of a property
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Thanks for the replies everyone.
Especially interesting to hear from chesebert on his own HK experiences - although I have to say it's not easy just moving away when you've got a career path and extended family already here. Also I don't think HK is doing enough to protect its own people. Yes, it's free market and all that, but at the expense of people's ability to have their own home. If the Govt had set up limits on buyers like Singapore (i.e. only SG nationals can buy landed property, and all families are guaranteed a place to live), then at least families would have the ability to focus on their careers and saving. HK is brutal in that sense. Anyway - I already live in village housing with family. I would consider buying village housing in the future as you suggest.
Thanks pbkmaine for the calculator - seems to balance the choice between buying and renting for me. It is painful to think of all the capital I've saved being locked up in bricks and not earning me good ol returns in the stock market.
Several people noted transaction costs and tax, as well as ongoing maintenance and tax liabilities - am aware of this and it does add a hefty burden to the already high cost.
I think the solution I gather from people then is do maths for rent/buy only when I am more certain of future plans. Just hope HK property will fall in price before then!
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Are there any cheaper neighbourhoods worth considering? Is an $840k apartment in a fancy area?
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Are there any cheaper neighbourhoods worth considering? Is an $840k apartment in a fancy area?
No, pretty standard price for average location close to public transport. Fancy area property values in HK goes into the $2,600 to $4,000per sq ft category (which for 500 sq feet would be about $1.9m)
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I would not, partly because it is putting the vast majority of your investments into one place.
We are hit with mainland chinese property buyers here, too... and their drive for a "safe" investment (property) has pushed a panic button on the housing market, only somewhat tempered by local buyers / owners not purchasing. You, on the other hand, do not have that mitigating factor...
I do think that this is a 5 to 10 year trend that we are about half way through, and the demand for safe property based investments will eventually fall when a different type of investment is available/ popular, or when investing regulations change in China. As soon as that huge population of mainland chinese look elsewhere for investments, prices will stabilize / fall.
I am also leary of the potential for political rules regarding ownership and taxation to change quickly in Hong Kong. So many changes in the country in the past decade, and looking forward.
So, IMO..
The only reason to buy would be that it was definitely cheaper than renting, in the first 5 years of ownership.
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I smell a bubble, just based on the math. Tripling in 7 years? That makes the US housing bubble look like child's play. Then again for HK in particular you have the political dynamics of the reversion to Chinese control in play.
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HK has more volatile real estate cycles than a lot of places. You also have a lot more speculators.
It has a cycle. If you can't afford to lose the money -- wait for the next down cycle. It will come.
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I smell a bubble, just based on the math. Tripling in 7 years? That makes the US housing bubble look like child's play. Then again for HK in particular you have the political dynamics of the reversion to Chinese control in play.
The bubble has been blowing for almost 10 years now...I was priced out then and even more priced out now...
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I don't know if not buying is the answer. I'm reasonably familiar with the Vancouver market, which has been called a bubble for the past 15+ years. It's cooled slightly in the past few months, but I don't think it's done yet. We're selling our Vancouver property, even though I think it's value will continue to increase, despite the fact it's value doubled in the past year. We're selling for other reasons, but from a purely mathematical stance we should hold it for a few more years.
I know of several families who launched themselves into FIRE by buying property there in the past couple years, making small improvements and then cashing out and moving to a cheaper, less urban area. On a high value property, you really don't need much of an increase percentage wise to make a ton of cash.
The reality is that HK is an island (limited supply) and a desirable place to live (high demand). That means land will always be in demand there. If you have the nerves to ride out any downturns and you want to stay there for 7+ years, go for it.
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What is the actual cost of new construction? That's the number that's going to determine the price long term. I know HK has limited space, a lot of which is already under several floors of skyscraper, but that should already be factored into the real number.
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Just a "What if" here... but the reason HK land is scare, despite a huge China mainland next door, is the differential treatment to business / residents. This has created a desirable place to live and work (and play).
So -- What if the political rules / laws were to change to create a second "HK like" zone within mainland china? A very large zone?
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I smell a bubble, just based on the math. Tripling in 7 years? That makes the US housing bubble look like child's play. Then again for HK in particular you have the political dynamics of the reversion to Chinese control in play.
The bubble has been blowing for almost 10 years now...I was priced out then and even more priced out now...
From the data and anecdotally from friends who live there, the previous peak was 1997, and prices did not go back to 1997 levels until around 2011. HK real estate is expensive no matter what, but I disagree that it has been in a bubble for 10 years. Real estate cycles are long. You can't afford anything right now anyway. You might as well wait for the downcycle. My two cents anyways.
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Wait for SARS 2.0.
I wish I was old enough to have understand world trends when SARS hit. People bought nice places in Tung Chung for under $200k USD!
Live in Causeway Bay and if prices drop, rent me a bed when I come to visit.
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What is the actual cost of new construction? That's the number that's going to determine the price long term. I know HK has limited space, a lot of which is already under several floors of skyscraper, but that should already be factored into the real number.
Land is being sold to developers at around $650 to $1000 per sq foot, then factor in a high cost of construction (labour shortages because so many new projects on both civil and commercial projects), and you have a mighty price on the retail end! Just yesterday they announced a new development "for young people" of about 140sq feet, going for the equiv of $400,000! Bargain.
Just a "What if" here... but the reason HK land is scare, despite a huge China mainland next door, is the differential treatment to business / residents. This has created a desirable place to live and work (and play).
So -- What if the political rules / laws were to change to create a second "HK like" zone within mainland china? A very large zone?
For sure, land is very valuable here. HK is pretty unique in its law, culture, business ethic, history and being a 'gateway to China' - but I think there is something wrong when the highest earners in a territory are having to settle for flats the size of a carpark.
I would not, partly because it is putting the vast majority of your investments into one place.
We are hit with mainland chinese property buyers here, too... and their drive for a "safe" investment (property) has pushed a panic button on the housing market, only somewhat tempered by local buyers / owners not purchasing. You, on the other hand, do not have that mitigating factor...
I do think that this is a 5 to 10 year trend that we are about half way through, and the demand for safe property based investments will eventually fall when a different type of investment is available/ popular, or when investing regulations change in China. As soon as that huge population of mainland chinese look elsewhere for investments, prices will stabilize / fall.
I'd like to think they'd fall sooner, but the news in HK is that people are totally unfazed by the potential Fed rate hikes. The HKD is linked to the USD, so all monetary policies are greatly reflected here, meaning really cheap loans and mortgages right now, even though the economy recovered much quicker than the US. So it's created a strange situation where asset valuation is based on belief the interest rates won't go up. It beggars belief as to how many people can still afford a place to stay buy here, and on much lower salaries than myself.
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Albatross, excellent points...
So what will happen to HK when it loses its workforce, even professional workforce due to exhorbiant living costs? How long before that happens? (or do many already own, so it is only the new generation facing troubles?)
I am curious about your answer, as here, residential within a reasonable drive of downtown is quite costly. e.g., $500k for a small apartment..
140sq.ft is nuts, though. My first apartment was 200 sq.ft and I thought that was small.
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Goldielocks - those are all legit concerns, but people here don't seem too concerned about it. I think simply put the market will fall, but not crash. When so many have bought at such a high price, they won't be willing to sell at a loss. Most are also not buying to speculate - they simply think if they don't get on the property ladder now they never will. Also, most buyers are middle aged and already own properties, and may be buying for their children.
Here's an article from the local paper that came out yesterday on this: http://www.scmp.com/news/hong-kong/economy/article/2018274/and-away-hong-kong-residential-flat-prices-rise-aggressive
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OP, that seems like a large down payment percentage for HK. Are you looking at buying a village house rather than a standard apartment, or an old building? New developments run by those half-dozen taipan families who are strangling HK can offer the best deals in terms of financing.
So what will happen to HK when it loses its workforce, even professional workforce due to exhorbiant living costs? How long before that happens? (or do many already own, so it is only the new generation facing troubles?)
I am curious about your answer, as here, residential within a reasonable drive of downtown is quite costly. e.g., $500k for a small apartment..
140sq.ft is nuts, though. My first apartment was 200 sq.ft and I thought that was small.
There are tens of millions of educated Mainlanders who would be happy to replace those who leave HK. Thousands are immigrating every year, 1.5 million total since the handover 20 years ago. They're 20% of the population now.
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I have lived in Hong Kong for over 10 years, bought a place in 2010 and sold it last year. I would not even remotely consider buying one at the current prices.