Take advantage of Hong Kong

The advantages of Hong Kong are:

1. low income tax
2. comparatively high salary for same job in another country
3. efficient public transport
4. cheap labour (for non-professional workers)
5. cheap to purchase a used car
6. cheap telecommunication services (Internet, mobile phone, etc)

The disadvantages of Hong Kong are:

1. High property prices (to buy or to rent) to be geographically close to Central
2. High population density
3. Parking costs and fuel

How to maximise the advantage and minimise the disadvantage?

1. Live further away from Central to reduce rent and increase size of apartment
2. Buy a car to mitigate living further away from Central
3. Hire a driver to avoid parking costs and increase convenience

My best property deal so far

Negotiated purchase price to $525,000 from the original asking price of $588,000 for a two bedroom apartment on Castlereagh St, Sydney that was 93 sqm.

Non-equity related purchasing costs (stamp duty, government charges, conveyancer, bank fees) = $21,900.23

TOTAL COST TO OWN = $546,900.23

Bank will lend 70% X $525,000 = $367,500

New equity drawn from other properties = $111,000

Redraw from other loans = $40,000

TOTAL BANK MONIES = $518,500

Our "new" cash required: $550,577.98 - $518,500 = $28,400.23

(only 5.19% of the total cost required as cash)

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Net rental income: $22,805.80 for a 4.34% net income yield on purchase price.

(Gross rent is $650 per week. For net income then less strata, water, council, managing agent and insurance)

Loan interest rate at 4.66% = $22,298.10

Positive cashflow per annum: $22,805.80 - $22,298.10 = $507.70

Return on cash used: $507.70 / $28,400.23 = 1.79%

Live in Hong Kong forever? - Part II

There are also intangible differences between Hong Kong and an expatriate's home country, for example, Australia.

The intangibiles include: pollution/health concerns, language, population density, mannerisms and cultural differences. Hong Kong is certainly an interesting and lively place to visit if you're a tourist or even for a short-term stay. However, after a while one will realise that the inability to communicate effectively with the local population in Cantonese, the high population density and the selfish behaviour and impoliteness experienced frequently becomes a significant deterrent to residing long term in Hong Kong.

If you have children, then in my opinion the situation is far worse. It is unfair to subject your children to a lower quality of life compared to your childhood growing up in Australia. The lower quality of life is manifested by smaller living conditions and higher pollution . Also, it is unfair to send your children to a public school in Hong Kong (unless you can afford to send them to a private International School) when you received a better education in Australia which promotes individual achievement and lateral thinking rather than solely focusing on academic results and rote learning. Also, public education in Australia is free, and the university fees in Australia can be deferred until employment where those fees are paid back to the government.

The main questions are (which are subjective):

1. how do you measure your quality of life. Is it merely the size of your bank balance or asset sheet when you die?
2. what real prospects do you have in Hong Kong to be truly wealthy i.e. a business owner and therefore do not have to actually work to earn an income?
3. is it fulfilling enough to be earning a higher net salary compared to your home country until you retire. You may be "wealthy" when you retire but this is countered by the sacrifice of 30 years of a lower quality of life. Is it merely a trade-off between financial security instead of financial freedom?
4. Has your existence become "soulless" by working hard for other people which has now mutated into a thankless, spiritually unrewarding and mentally unchallenging routine?

Its sometimes easy to forget your identity that was heavily influenced from your childhood in your home country and adopt the lifestyle and mentality of the country you work in as an expat. But every now and again it is worth conducting an audit of your goals, motivation and lifestyle, and check how things would be like back in the home country with the cash that you have saved working as an expat.

Why expats choose to live in Hong Kong forever

Disclaimer: These are my opinions and are not necessarily applicable to other expats working in Hong Kong or shared by them.

Most expats come to Hong Kong to live and work because of the relatively high pay and low income taxes compared to their home country. However, they soon realise that it is financially impossible to recreate the lifestyle they had in their home country in Hong Kong because it is prohibitively expensive for things such as:

1. Accommodation
2. Good food (like a good steak, meat, fruits and vegetables)
3. Parking for vehicles (HK$200 per hour in Hong Kong after the first free hour or two)

Let's quantify the accomodation cost difference because this is the largest expense in Hong Kong. In Sydney, one can buy a 93 sqm (1001 sqf) two bedroom apartment for A$525,000 (HK$3,402,000) on Castlereagh Street in the Central Business District (CBD). In Hong Kong, a 982 sqf apartment costs HK$8,000,000. That's a 135% difference in price on comparably a similar location and size. Another important difference is that in Australia the title is freehold whereas Hong Kong is leasehold until 2047.

In Hong Kong, the rent for the 982 sqf apartment is HK$25,000 per month. In Australia, its $700 per week which HK$19,660 per month. The interest rate on a mortgage in Hong Kong is only 2.1% p.a. while in Australia, the interest rate is 4.66% (as a 1 year introductory rate). Yup, so a higher rental income and lower mortgage costs in Hong Kong.

This concludes the apples to apples to comparison.

But why compare only between apples when Sydney offers a far better option than high density living in the CBD. For 20 minutes drive from the city to the suburbs, one can own a freehold title in a 727 sqm (7825 sqf) block of land and build a double storey house on it. Cost for the land is A$600,000 plus cost for building the house A$220,000, making the grand total is A$820,000 (HK$5,314,000). This is more space than 99% of people in Hong Kong will ever own or enjoy.

12 Riches of Life by Napoleon Hill

1. Positive mental attitude
2. Sound physical health
3. Harmony in human relations
4. Frredom from fear
5. Hope of future achivement
6. Capacity for applied Faith
7. Willingness to share one's blessing with others
8. To be engaged in a labor of love or purpose
9. An open mind on all subjects toward all people
10. Complete self discipline
11. Wisdom with which to understand people
12. Financial security

The first 11 riches cannot be quantified by money.

Also a great quote from Hill:
"Every person who wins in any undertaking must be willing to cut all sources of retreat. Only by doing so can one be sure of maintaining that state of mind known as a burrning desire to win -essential to success."

As an expat, why buy in property Hong Kong?

The apartment I live in was bought by my landlord for $8m in June 2008. It was $8,146 per square foot.

HSBC valued the property at various times as:

10 February 2009 - $6.24m (-22%)

15 April 2009 - $6.55m

18 May 2009 - $6.86m

11 August 2009 - $7.56m

The landlord's purchasing cost is:

$300K - stamp duty

$80K - agent's commission

$8K - lawyer's cost

Grand Total - $388K

Assume our landlord has a 70% home loan to avoid mortgage insurance and has a 2.1% interest rate over 30 years. Her monthly repayments are $20,980 and the interest component is $9,988. Each month, the landlord's operational expenses are:

$9,988 - interest

$1,571.20 - management fee

$890 - government rate

$175 - fire insurance

Sub-Total is: $12,624.2

Amortise the purchasing cost above into 24 months, and then

Grand Total is: $28,790 per month

Our cost to rent is $25K X 24 months = $600K + agent's commission ($14,312.50) + stamp duty on tenancy ($812.50) + removalist cost ($2,980).

Amortise the agent's commission and removalist cost into 24 months, and then

Grand Total is: $25,754.38 per month.

Therefore it is cheaper to rent than buy in the example above.

Furthermore, as an expat, why bother contributing to the HK economy by purchasing. You are paying the agent, the lawyer and the government a total of $388K. If your rent was $25,754.38, this would cover 15 months of renting.

If the current price of an apartment is selling for above the long term average price, then your financial risk is:

1. The price of the apartment must rise by $388K + $1% of selling price (to your agent) at the time you sell it.
2. You cannot lose your job or sell quicklyto avoid the negative effects of bad timing.
3. If you intend to return home to your country, you are exposed to currency exchange risk because you the exchange rate may be bad when you sell your apartment.

Paying the rent subsidises (or in theory completely cover) the landlord's cost. But the landlord bears the risk of the asset devaluing (up to 22% devaluation as seen above). To be a profitable investment, the landlord should generate 10% on the cash input ($2.4m - 30% deposit and $388K), which is 10% X $2,788,000 = $278,800 per year is what the property needs to appreciate by which is 3.485% of the purchase price.