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:
- The price of the apartment must rise by $388K + $1% of selling price (to your agent) at the time you sell it.
- You cannot lose your job or sell quicklyto avoid the negative effects of bad timing.
- 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.
At the end of the day, buying an apartment in Hong Kong is a gamble and not so much different from buying property elsewhere.
ReplyDeleteYou are incurring a definite loss of $388K in the hope of recovering that amount back when you sell it, and also earn a return at least $278,800 per year on the cash you spent $2,788,000. So opportunity cost also plays a role.
However, due to its high price relative to the size, it is a larger risk to buy in Hong Kong.
Hong Kong lacks fundamental drivers of property growth which is a high immigration rate like Australia enjoys. Australia simulates the same lack of land supply conditions as Hong Kong by restricting the release of land, especially in Sydney.