Sam Lee is a marketing manager and property consultant at JML Property. JML was established in 1994 and offers Investment Property & Homes. It specializes in managing properties for owners and investors, and providing attractive and comfortable homes for tenants.
There was a recent article in the South China Morning Post titled “Hong Kong’s infatuation with multimillion-dollar shoebox homes is over as quickly as it began”. The article read “of the 1,549 micro-apartments built by 10 developers in Hong Kong since 2016, one in three remained unsold…” and continued to say that according to industry analysts and developers, the micro-apartments will likely fall in price in 2019, with declines up to 30 per cent.
Micro-apartments are typically less than 200 square feet in size, and at the height of the bull market a 190 square-foot flat in Sai Ying Pun broke records when it was sold at HKD 6.52 million, or HKD 34,315 per square foot!
The Hong Kong bull market came to an end August of 2018, when the vacancy tax introduced to boost Hong Kong’s housing supply started squeezing developers and mortgage rates started rising for the first time in 12 years.
This left some buyers with a very small, and very expensive property with declining value. For some, it could even mean hitting the dreaded “negative equity” territory where the value of the property is LESS than the amount borrowed against the same property.
Negative equity usually occurs when a speculative buyer who is over-leveraged gets caught near the top of the market before it turns. In many cases the property gets foreclosed by the lender, usually a bank, and if this happens across a wider scale it can have devastating economic implications as we know.
Fortunately, we do not have micro-apartments under 200 square feet for sale in Macau, but we are likely to feel the impact of the broader market shifts in Hong Kong. What are a couple of quick lessons we can learn from this situation?
The first and most obvious lesson is that we do not want to run into a raging bull-market with cash-in-hand. It is best to stay away from frenzied property sales floors and watch the crowd from a distance. No matter how much it feels like the bull market will continue forever, it never does. The truly good deals are found during bear markets anyway.
The second lesson is that you generally want to avoid the extreme ends of the market. If you buy at the very bottom (micro-apartments) or at the very top (luxury properties) of the market, you’ll find that demand can shift very quickly with the turn of the market. The safest place is generally in the middle of the market where demand is more robust. Savvy investors know to buy lower-middle class properties, and add value to turn them into upper-middle class properties.
Lastly, we must recognise that real estate is an archaic and stubborn industry. Although there is a true housing crisis in Hong Kong and innovation is required, when it comes to potentially the biggest investment for you and your family, you do not want to be at the cutting-edge of the innovation where there are additional layers of uncertainty. Building micro-apartments was a speculative experiment by the developers in a bull market, but it turns out people don’t really want to live in 200 square foot houses if at all possible. Can’t say I’m too surprised!