Blowing Bubbles?

Is Hong Kong real estate in a bubble?

It’s easy to think so. After all, prices have surpassed their previous highs, and speculation is rampant. A wave of buying from the mainland has pushed housing prices up over 30% in the past year, on top of a 45% jump last year. If the past is prologue, a contraction in real estate will wipe out property owners equity and saddle Hong Kong banks with massive real estate holdings at a loss.

But the Hong Kong government is pulling out the stops trying to bust any bubble. They recently increased down payment minimums from 30% to 40%. The funny thing about bubbles is, when you’re in one, most people don’t think you are. From Dutch Tulips to South Sea speculation to internet stocks, people at the time think that some social or technological change has permanently altered the landscape and the new reality will lead to a new era.

In Hong Kong’s case it’s easy to see what’s driving the market. New wealth in an export-driven China is pushing up demand for luxury homes, and there’s not that much land available in the port city. Is this a new era?

Maybe. Or they might be continuing to react to the slide in prices from ’97 to ’04. The only certain thing about a bubble is, six months after it pops, everyone predicted it.

Douglas R. Tengdin, CFA
Chief Investment Officer
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