Why Hong Kong is the world’s most expensive property market
Another day, another survey showing that Hong Kong is one of the most expensive cities in the world to live. The Economist Intelligence Unit’s Worldwide Cost> READ MORE
Another day, another survey showing that Hong Kong is one of the most expensive cities in the world to live. The Economist Intelligence Unit’s Worldwide Cost> READ MORE
When was the last time you learned something new? Did it make you richer, happier or more productive? If the answer is no, you could be an information junkie.> READ MORE
Jim Rogers is an investment legend… and we’ve shared his thoughts before (like here and here… and here). He’s one of the most successful investors in the> READ MORE
A boy with a straw and a spitball can start a war involving guns and grenades. Earlier this week, the American government fired a spitball. On Tuesday, the> READ MORE
Another day, another survey showing that Hong Kong is one of the most expensive cities in the world to live.
The Economist Intelligence Unit’s Worldwide Cost of Living Survey released recently showed Singapore as the most expensive city to live in, with Hong Kong second.
When it comes to the cost of real estate, Hong Kong prices are at the top of the list. Buying a no-frills one-bedroom apartment near Hong Kong’s central business district will set you back around US$1 million.
Just take a look at Hong Kong’s residential prices since 2008 versus the U.S. and U.K. Prices are up more than 100 percent!
Why is Hong Kong property in such a massive bull market?
Over the past few weeks, I’ve been asked about this numerous times. The week before it was Bloomberg’s Rishaad Salamat doing the asking (click here watch the interview.)
And then last week I spoke about Hong Kong’s property market at Morgan Stanley’s 7th Annual Hong Kong Investor Summit.
A lot of people think that buyers from mainland China are pushing up prices in Hong Kong. (Remember, Hong Kong is politically separate from China, but it’s under Chinese control.)
Over the past few years, we’ve seen the story of “Hot Mainland China Money” playing out across real estate markets all over the world.
There’s a lot of mainland Chinese cash looking for a home outside of China, for diversification reasons and because wealthy folks simply want to move their money outside of China’s borders.
Their number one investment target is offshore real estate in markets like London, Los Angeles, New York, Vancouver, Sydney and Auckland, to name some prominent examples.
This “hot” mainland China money has also gotten a lot of the blame for property price increases in Hong Kong.
But I want to show you some data on why that conclusion is wrong for Hong Kong.
Here’s why Hong Kong is different
You see, back in 2012, the Hong Kong government introduced a new stamp duty aimed at cooling Hong Kong’s red-hot property market.
This additional Buyers Stamp Duty (BSD) added a whopping 15 percent to the purchase price of residential property for certain buyers. Any buyer who is not a permanent resident of Hong Kong is subject to this stamp duty, along with corporate buyers acquiring a property in the name of a company.
So for that $1 million small apartment, you now have to pay an additional BSD of US$150,000… and this is before we get to other stamp duties or costs payable.
This BSD, therefore, captures individual mainland Chinese buyers, along with anyone who is looking to buy residential property in the name of a company and not themselves.
But in each of the past two years (2015 and 2016), less than 5 percent of the total residential sales transactions have been subjected to this additional BSD.
So even if ALL of the BSD taxpayers were mainland Chinese (unlikely given that people living in Hong Kong and elsewhere continue to use companies to buy Hong Kong property), it’s obvious that mainland Chinese money cannot be blamed for driving prices up.
Mainland buyers are a fraction of the total. We cannot blame them for Hong Kong’s high apartment prices.
So, if not mainland buyers, who is to blame? The Federal Reserve for keeping interest rates so low for so long? Perhaps, but the real culprit is much closer to home.
The Hong Kong government
All land in Hong Kong is owned and sold by the government. Public housing is provided by the government and either sold or rented. This housing, which accounts for about 56 percent of the total residential housing stock, is provided for lower income families who would normally find private housing unaffordable. These families don’t usually buy in the private real estate market.
On the private side, land parcels are auctioned by the government to local (and increasingly mainland Chinese) developers.
Those residential units are built and sold into the market.
Take a look at the chart below. It shows the number of both public and private residential units completed each year. This is Hong Kong’s total annual housing supply.
Between 1984 and 2005, total annual housing production was around 67,000 units per year.
But between 2006 and 2015, that number dropped to just 24,000… that’s 65 percent below the long-term annual average!
Hong Kong’s population has continued to grow, along with a need for more housing.
Government land policies have cut back the supply of housing to meet those demands, in both private and public sectors.
The government’s own forecasts of future private housing supply in the coming few years still fall well short of long-term average production.
And even their forecasts are often very optimistic. Our research has shown that over some 30 years, the government overestimated future housing supply by an average of 23 percent!
So what does this mean?
Well, from a supply point of view, Economics 101 will tell you that lots of demand without supply will lead to high prices.
And it means that when a government holds so much control over a scarce asset (in this case land) then it commands a huge influence on pricing.
We should use that to our advantage. Hong Kong has some of the largest and most profitable real estate developer companies in the world. Several are trading at very attractive valuations compared to their longer-term averages.
As for the folks trying to get on the world’s most unaffordable property ladder who keep asking me, “Pete, when’s it going to end?”, I’m afraid that the base case scenario is that prices don’t meaningfully correct any time soon.
You might not be able to buy an apartment, but you can still participate in Hong Kong’s property market with the right real estate stocks.
I’ve been covering Hong Kong property stocks for nearly 30 years, and I tend to focus the majority of my recommendations on a handful of top quality companies. (But in the interests of being fair to subscribers of The Churchouse Letter, I won’t include those here.)
Alternatively, you can take a look at the Guggenheim China Real Estate ETF (New York Stock Exchange; ticker: TAO). This gives you a basket of Hong Kong and Mainland Chinese real estate developer stocks and REITs. Around 80 percent of the ETF is in Hong Kong real estate stocks, with mainland China taking up the other 20 percent.
If you’re looking for a Hong Kong property ETF then this is OK. Although jumbling up Hong Kong and mainland China stocks in a single ETF isn’t ideal. These are completely different markets and should be treated as such.
Just yesterday, mainland Chinese developer stocks fell between 3-5 percent in a single day due to real estate tightening curbs announced over the weekend. Hong Kong property stocks were more or less flat!
When was the last time you learned something new? Did it make you richer, happier or more productive? If the answer is no, you could be an information junkie. This week, Mark Ford reminds us that acquiring knowledge is only half the battle… and shares his two simple rules to becoming more successful.
By Mark Ford
I hadn’t seen Dave in almost 20 years.
He had been my dentist for a number of years and had later continued to care for my family. Dave contacted me when he discovered that I was the man behind the “Michael Masterson” pen name.
“How about lunch?” he wrote. “I’ve got a bunch of things I need to ask you.”
The anxious dentist
Several weeks later, we were eating chopped chicken salads together. Dave seemed nervous. It was as if he were intimidated by the Michael Masterson persona. I did my best to assure him I was the same person who used to wince in pain when he cleaned my teeth.
We talked a bit about family news, but it was clear he had something else on his mind.
Eventually, he mentioned a decision he was trying to make: Should he spend $100,000 on the highest level of an internet marketing program he had been looking at?
“I’ve been studying their stuff,” he told me. “It’s really good. But I’m not sure it makes sense for me to invest that kind of money.”
“A hundred grand is a lot of money,” I said.
“But you get an awful lot for your money,” Dave explained. “They do all the technical stuff for you, which I’m not very good at. All I’d have to do is come up with the ideas.”
“Well,” I said, “what ideas do you have?”
Dave didn’t have a single one. “All I know is that I am in the wrong business,” he said. “I took this self-test online — and I found out I’m in the worst business in the world for me.”
What does Dave want to do?
At nearly 50 years of age, Dave had just concluded that his entire career had been a waste.
“I’ve wanted to be a dentist since I was 8 years old,” he told me. “If I had known then what a bad business it was for me, I would have done something else.”
“Like what?” I asked.
“Like what you do,” he said. He was smiling, but he looked serious.
“Look,” I told him. “My business is a great business — but I don’t think you should conclude that your life has been wasted simply because you took some pop quiz that was probably designed to sell you something.”
“But it was right,” he insisted. “It proved something I had always known but was afraid to admit.”
The waitress filled our drinks. We ate in silence for a while.
“So, what I’m thinking is that, since I’m not into the technical stuff, this internet marketing program would be very good for me.”
“How much time have you invested in learning about internet marketing?” I asked.
“About three years,” he answered.
“And how many information products on the subject have you bought in that three-year period?” I asked.
Dave laughed. “I can’t even count that high,” he said.
“How much money have you spent?”
“Tens of thousands. Probably more.”
“And yet, you haven’t actually started an internet marketing business,” I said.
He nodded, then rattled off the names of every internet marketing program he’d bought — all the ones that I knew and others I had never heard of.
“That’s a lot of buying,” I told him.
“Tell me about it,” he said.
Dave explained that when he reads an advertising promotion pitching a new internet marketing product, he is “totally taken in by it,” even though he realizes he is just reading “a sales pitch.”
“But even though I know that I’m being seduced by a professional wordsmith, I can’t stop myself from buying.”
The (information) junkie dentist
“I hear you,” I said. “You are an information junkie.”
“What about you?” he said. “I read that you read a lot of informational books — about one every week.”
“I do,” I said, “but I’m not an information junkie. I’m an information user.”
“So what’s the difference?”
I explained that the difference is huge. An information junkie is addicted to the process of buying information. Although he may delude himself into thinking otherwise, he has no intention of ever using the information he buys.
An information user is very practical about his purchases. He buys information for specific, pragmatic purposes. He uses the information he buys to achieve specific goals — to start or grow a business, to learn a new language or to improve his negotiating skills.
An information junkie is happiest at the moment he is buying the information. His enthusiasm soon wanes, however. Within hours or days of receiving it, the information junkie is on to other things. The new product goes up on the shelf with the old products. He’s excited about the next new one.
An information user makes progress. See him reading a book about nutrition, and there’s a very good chance (if he likes the book) that his eating habits will change in the immediate future. The information junkie, in contrast, may have 26 books about nutrition in his living room. He may even have read them all — while he was lying on the couch eating potato chips.
An information user is someone who consumes information to profit from it. If he invests $100 in learning about a subject, he expects to see a substantial return on that investment — perhaps a thousand dollars’ worth of value, either material or spiritual. An information junkie consumes information like drugs or candy bars. It gives him an immediate rush and then nothing afterward. That’s why he needs to buy more.
The information user has long-term expectations when it comes to knowledge. He believes the knowledge he acquires now will compound over time as he learns more and is in a better position to leverage what he has learned for a greater benefit. The information junkie is in it for the here-and-now. He doesn’t believe in saving. He’s always on to the next hot thing.
What about you?
Are you an information junkie? Take this test and see.
Answer “Yes” if you agree with the statement below, or “No” if you don’t:
1. In the past year, I’ve purchased more than 12 books that I haven’t read. (If your answer is Yes, give yourself 2 points.)
2. In the past year, I’ve purchased:
3. In the past year, I’ve purchased at least one $1,000 information product that I didn’t use. (Yes = 5 points)
4. I am most excited about the information that I buy:
5. When I read a book, I feel compelled to read it from cover to cover. (Yes = 2 points)
6. I generally take notes when I read something. (Yes = 1 point, No = 2 points)
Well… how did you score?
If you scored 8 or above, you are indeed an information junkie.
If this is the case, don’t despair. You can convert yourself into an information user simply by following two rules:
That’s all there is to it. Obey these two rules, and you’ll not only break your addiction, you will radically improve your life.
Jim Rogers is an investment legend… and we’ve shared his thoughts before (like here and here… and here). He’s one of the most successful investors in the world and has unique insight on the world of investing.
I’ve had the privilege to sit down and pick his brain about global markets several times. (It helps that we both live in Singapore.) Below are excerpts from a recent conversation (you can learn how to see the entire exclusive interview here).
During that discussion, I asked Jim about his investment process and what he thinks about when deciding where to invest. I’m happy to share his insight below.
Jim’s investment process
Jim likes to look at the big picture when making investment decisions (some of his best big picture ideas are found here. Below, he explains what he does after he sees the big picture.
Me: So, would it be fair to say that you start off from a macro level and then work down to micro? [In economics, the big picture is also called the “macro”, as in macroeconomics. The smaller details are the “micro.”]
Jim Rogers: Well, normally, yes. As I say, the Chinese government is spending a lot of money cleaning up China [more about this big picture can be found here]. That’s a pretty big macro approach. And then I see what’s going on. So then I say, “Okay, now how do I do something about it?”
I guess it could be a micro if I happen to run into a product or a company or something that seems to be exciting and promising. That too can lead to ideas. I don’t have any simple way to find ideas. I wish I did. Life would be a lot simpler. I guess I could just sit at my desk and wait for Morgan Stanley [the global financial services firm] to send me something, but I don’t normally talk to brokers or investors.
Me: So you have the idea. And then what are some of the steps in doing the actual research and converting the concept into something to buy?
Jim Rogers: Well, when trees grow to the sky [when everyone is excited about a stock or investment], you’re selling short [a strategy to profit from falling stock prices]. So, it’s not just buying, it’s selling. It depends on what you’re pursuing.
Annual reports, obviously you have to read the financial statements of companies. You have to do spreadsheets of numbers of the companies to see what’s going on. Do they have a lot of debt? High margins? Low margins? High return on equity? That sort of thing.
And then you talk to competitors, you talk to customers, you talk to everybody, suppliers. You talk to everybody you can to find out if this is right or wrong, and I still make plenty of mistakes.
Some of Jim’s biggest mistakes
Me: What’s an example of a mistake or two that you’ve made?
Jim Rogers: Very early in my career, I knew that the markets were going to collapse and so I sold short, everything [selling short is a way to make money when markets, or stocks, fall in value]. And low and behold the markets five months later, total collapse, chaos. Never been anything like it since 1938. People all around were going bankrupt. And, here I was making a fortune. You know, I couldn’t believe it. Triple my money in five months. And so I said, “This is so easy. I’m going to be so rich. This is just amazing how easy this game is.”
I sold my puts on the day it hit bottom. [Puts give you the option to sell a stock at a certain price on a certain date and they’re used by investors that think the price of a stock is going to fall.] Astonishingly enough, I mean this is an amazing story as I look back on it. I said, “Okay now I’m going to wait for the market to rally,” because I knew it would after that kind of collapse. And then I’ll really make a lot of money.
And this time I’m not going to pay the premium to buy puts, I’m just going to sell short. So, I went and sold six companies short. And, two months later I was wiped out. I lost everything. Almost had to sell my motorcycle. It was that bad.
And interestingly enough, within two years, all six of those companies were bankrupt. All of them. But I lost everything first because I didn’t know about markets. I didn’t know about timing. I didn’t know that markets could do really strange things. I just assumed that everybody knew what I knew.
Lesson learned: Don’t invest in the heat of the moment
Jim Rogers: One of the first lessons I learned, have learned is, people don’t know what I know, or think I know, so I have to learn. And my timing is horrible. I am the world’s worst market timer, world’s worst short-term trader, so I know that when I say it’s time to do something, I have to wait because I know I’m going to be early. And even then I get early sometimes.
So I made plenty of mistakes, but thank goodness I’m not married to that woman anymore. What a wretched life I would’ve had.
Me: So what you just said, when you think it’s time to buy, you wait. So how does an investor figure out what is a good buy and is it within 20 percent of…
Jim Rogers: I don’t know. I don’t know how to do it. If I were that smart, I’d be rich. Boy, everything would be great. One thing I do… I usually put in limit orders because I don’t trust myself for the timing. So I put in the limit order to buy or to sell [we explained limit orders here], and then, the market can do it for me… rather than sitting there in the heat of the moment, because I know I’ll get it wrong in the heat of the moment.
See the full interview
Jim shared a lot of his investing and life experience with me during this conversation, including where he’s investing now, where he’d like to visit again and why we should all be learning Mandarin.
You can find out how to see the entire video, Jim Rogers unplugged, by clicking here.
A boy with a straw and a spitball can start a war involving guns and grenades. Earlier this week, the American government fired a spitball.
On Tuesday, the U.S. government announced that air travelers from ten cities in the Middle East would not be permitted to carry electronic items any larger than a phone into the cabin on flights bound for the U.S. (The U.K. quickly followed suit.) Passengers carrying any electronic devices bigger than a phone — including laptops and tablets – through the affected cities on the affected airlines will need to leave them at home, or else stow them with checked luggage (where the chances of damage or robbery are far higher).
The official reason for the ban, according the Department of Homeland Security in the U.S., is the concern that terrorist groups may smuggle explosives onto airplanes explosive hidden in consumer electronics. “Intelligence” has suggested that the bad guys might be trying a new approach, so the U.S. government is getting in front of it.
Perhaps there’s something to that – although it’s questionable whether the enormous additional inconvenience to passengers is justified by the reduced risk. And checking an explosive laptop into the hold won’t be a whole lot better than bringing it into the passenger compartment. New rules about screening electronic devices – rather than moving them from one part of the plane to another – might have made more sense (if in fact security was the concern).
Who’s affected? Me, and…
According to Bloomberg, the measure will most hurt Turkish Airlines, Emirates (based in the United Arab Emirates), Qatar Airways (in Qatar) and Etihad Airways (based in Kuwait) the most. These “have the most to lose from the U.S. ban since they rely on transfer passengers who may need access to laptops and other devices for business reasons and could easily travel via European hubs,” Bloomberg says.
They’re right. When I go to the west, I fly Qatar Airways or Emirates, if they’re competitively priced (and they always are), because they’re fantastic airlines. The planes are fresh, the staff is pleasant, the food is generally edible, and the experience is less bad (and sometimes genuinely pleasant) than any other airline. (Emirates and Qatar Airways are one-two in the World Airline Awards. The first American airline is Virgin American – ranked 25). But if I can’t take my laptop – which is the epicenter of my work – on the plane, I’ll probably take a different flight path and airline. Which is, I think, just what the measure wants to encourage.
A new kind of trade war?
I think this is instead the model of what could be a different kind of trade war – a blueprint for how the Trump government might carry out its threats of a trade war with China and other markets.
Remember, the measure only impacts certain airlines that fly through certain countries in the Middle East (some of which, incidentally, are also affected by the U.S. government’s travel ban). According to Bloomberg, no U.S. airlines fly to any of the affected airports.
But just because a measure singles out certain airlines, or cities, doesn’t mean it’s trade war material. As it happens, last month a group of U.S. airlines lobbied U.S. President Trump to try to get him to help them.
On February 9, Bloomberg reported that follow a meeting between the U.S. president and the heads of some of the largest American airlines, “President Donald Trump told U.S. airlines he would help them compete with foreign carriers that are aided by their governments, a crucial signal of White House support for an industry campaign that began in 2015.”
“Active involvement by Trump would answer two years of prodding by Delta Air Lines Inc., United Continental Holdings Inc. and American Airlines Group Inc. to act on claims that $50 billion in government support have enabled three Persian Gulf carriers to compete unfairly.”
These subsidies include low-interest or no-interest loans, free land, and below-cost fees and charges at state-owned airports. U.S. airlines contend that these subsidies give Middle Eastern airlines an unfair advantage. (Qatar Airways, Etihad Airways and Emirates have denied that they operate on anything other than pure economic terms.)
Reason to be worried
The U.S. airlines asking for Trump’s help have good reason to be worried. They’ve been losing market share on international routes. Maybe that’s because those airlines are subsidised, and maybe it’s also because their service – the only real differentiating factor in a commoditised product (whatever the brand, the point of an airplane is to fly you from one place to another) – is so vastly superior to that on offer by American airlines.
What’s conveniently forgotten is those U.S. airlines calling foul have also benefitted from subsidies (worth US$150 billion since the beginning of American commercial aviation in 1918, according to one study). And arguably business-friendly bankruptcy rules in the U.S. – which have allowed countless generations of airlines to declare bankruptcy and get rid of pension and other liabilities – is an unfair advantage too.
The new American measures are a roundabout way of trying – in the view of U.S. airlines – to level the playing field with Middle Eastern airlines. Global trade rules prevent any more direct measures – for example, by imposing additional landing fees, or reducing access of the airlines to U.S. airports. But using technical and administrative regulations is a crafty way of imposing a non-tariff barrier to free trade.
It’s not difficult to see how similarly veiled measures – which wouldn’t fall afoul of World Trade Organisation (the global trade regulator) rules – could be used to hit at China (as Trump has long threatened).
Will the affected airlines, or countries, retaliate? Probably not. But faced with a non-tariff barrier that impedes an entire industry, China wouldn’t hesitate. And that would be bad – bad enough to make the inconvenience of not being able to bring your laptop onto the plane seem like a good thing by comparison.
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