Another metric for housing value in HK

There is a fixation on the location of property in Hong Kong. However, I think the focus should be on travel time because basically it is the opportunity cost of time that is paramount. Reduction in travel time should mean an increase in leisure time.

Time = distance / speed.

Even though the distance may be greater, as long as the speed is faster, there is no change in time. Faster speed may be attributed to less traffic congestion, less traffic lights, less stops along a train line, etc. Due to the efficient public transport/general transport infrastructure in Hong Kong, speed is generally faster than in other countries.

A value metric for property based on travel time is proposed.

Price (purchase price or rent) is usually a function of convenience and also property size. One factor when determining convenience is the travel time to reach to Central, which is where most office jobs are located.

Raw distances
19.9kms - Seasons Monarch -> Prince's Building

3.9kms - Park Avenue -> Prince's Building

1km - Valiant Park -> Prince's Building

Via MTR from Seasons Monarch
Kam Sheung Rd MTR -> East TST MTR -> TST MTR -> Central MTR
27 minutes + 4 minutes (walking time) = 31 minutes
$4.9 + $15.9 = $20.80 fare

Door to door is 45 minutes
leave Seasons Monarch at 8:45am, arrive in office at 9:30am.

Kam Sheung Rd MTR -> Nam Cheong MTR -> Hong Kong MTR -> Central MTR
15 minutes + 12 minutes (3 minutes walking time at Nam Cheong and 9 minutes from Hong Kong MTR to Central MTR) = 27 minutes


Via Bus from Seasons Monarch
Tai Lam Bus Interchange -> ICC at Kowloon MTR via KMB bus no. 968, 969, 969P
20 minutes

Tai Lam Bus Interchange -> Central via KMB bus no. 968, 969, 969P
40 minutes


Via MTR from Park Avenue
Olympic MTR -> Hong Kong MTR -> Central MTR
7 minutes + 8 minutes (walking time from Hong Kong MTR to Central MTR) = 15 minutes


Seasons Monarch
$7,753,340 - Purchase Price/Cost Base on 13 October 2009
2,837 square feet. 1,322 square feet internal (usable). 46.59% efficiency. Excluding roof, driveway & backyard.

$2,732.94 price per square foot
$2,732.94 X 32 minutes = $87,453.96 to Central

$5,864.85 price per internal square foot
$5,864.85 X 32 minutes = $187,675.20 to Central

Park Avenue
$8,000,000 - Purchase Price on 27 May 2008. 8.8% compound annual growth rate.
$4,343,000 - Purchase Price on 1 March 2001
982 square feet. 743 square feet internal (usable). 75.66% efficiency.

$8,146.64 price per square foot
$8,146.64 X 15 minutes = $122,199.6 to Central

$10,767.16 price per internal square foot
$10,767.16 X 15 minutes = $161,507.4 to Central

Considering time to travel to Central with the price per square foot, Seasons Monarch is 28.4% cheaper than Park Avenue.

Considering time to travel to Central with the price per internal square foot, Park Avenue is 13.9% cheaper than Seasons Monarch.

Note 1: We are not including the benefit of a driveway at Seasons Monarch. A car park at Park Avenue is about $2,000 - $3,000 per month. To buy a car park is approximately $320,000. To make a fair comparison, then the $320,000 should be added to $8,000,000. The price per square foot for Park Avenue becomes $8,472.51. Therefore considering time to travel to Central with the price per square foot, Seasons Monarch is 31.2% cheaper than Park Avenue.

Note 2: We are not including the travel time door to door. It takes 5 minutes using the shuttle bus from Seasons Monarch to reach Kam Sheung Rd MTR station and 10 minutes to reach the Tai Lam Bus Interchange. However, it also takes 5 minutes walking time from Park Avenue to Olympic MTR station.

Owning in Seasons Monarch versus Renting in Park Avenue
$9,886.53 - monthly cash expense at Seasons Monarch (interest, management fee, rates, insurance) for 2,837 square feet
versus
$25,000 - monthly rent at Park Avenue for 982 square feet, in Tower 9, upper floor.

Assumptions:
If you live in the same location, but pay lower cost, then this is better.
If you live further away and pay a higher cost, then this is worse.
If you live closer and pay a higher cost or live further away and pay a lower cost, then we need to calculate whether it is better value or not.

Seasons Monarch - 32 minutes X $9,886.53 = 316,368.96
Park Avenue - 15 minutes X $25,000 = 375,000
Sorrento - 13 minutes X $26,000 = 338,000
Mei Foo Sun Chuen - 21 minutes X $16,000 = 336,000

The lowest value above indicates best value for money in terms of travel time to Central.

Differences in schooling between Australia and Asia

University

Assuming the goal is to have your children study at a University, then the FEE-HELP system offered in Australia is the most cost-effective. FEE-HELP defers the upfront costs of attending university and is paid back later by the child when they start to earn income and is not means-tested to be eligible. If their salary is > $43,151 they starting paying back their FEE-HELP loan to the government at 4% per year. The maximum repayment is 8% when they start earning > $80,137.

The lifetime loan limit for FEE-HELP is $85,062 for 2010 (higher limit for medicine, dentistry). For example, a 4 year Bachelor of Laws undergraduate degree at the University of Technology Sydney will roughly cost $35,424 in university fees. (192 credit points X $184.50) You must be an Australian citizen or permanent resident of Australia AND be a New Zealand citizen to be eligible.

Such a scheme is not offered in Asia. Attendance at a university in Asia requires upfront payment of fees. For example, at the University of Hong Kong, a 4 year Bachelor of Laws undergraduate degree incurs tuition fees for HK$42,100 X 4 = HK$168,400 = AU$24,680

Therefore attending an Australian university if you are an Australian citizen is not a difficult choice to make. Even though it may cost less to obtain a similar university degree in Asia, you must determine whether it is of the same quality and whether there are enough places to gain a place or if the entry mark is too high.

High School

Countries have both public high schools and private high schools. Public high schools are generally free while private high schools are not.

Private High School in Hong Kong versus Private High School in Australia

Australian International School in Hong Kong

Year 7 - HK$106,600 + HK$12,000 (capital levy) = HK$118,600

Year 8 - HK$118,600

Year 9 - HK$118,600

Year 10 - HK$118,600

Year 11 - HK$112,000 + HK$12,000 (capital levy) = HK$124,000

Year 12 - HK$124,000

Total: HK$722,400

English Schools Foundation (ESF) - Shatin College, New Territories

Year 7 - HK$89,250

Year 8 - HK$89,250

Year 9 - HK$89,250

Year 10 - HK$89,250

Year 11 - HK$89,250

Year 12- HK$89,250

Total: HK$535,500 (25.8% cheaper than the Australian International School)

Many schools in Hong Kong are Direct Subsidy Scheme (DSS) schools. They can set their own schools fees (usually HK$3,000 - $110,000 per year) and receive some government funding. A list of DSS schools in Hong Kong is found here:

http://www.edb.gov.hk/FileManager/EN/Content_175/schlist(fees)_e_c.pdf

Sydney Grammar in Australia

Year 7 - AU$24,318

Year 8 - AU$24,318

Year 9 - AU$24,318

Year 10 - AU$24,318

Year 11 - AU$24,318

Year 12 - AU$24,318

Total: AU$145,908 = HK$996,665

Public High Schools - Hong Kong

In Hong Kong, there are comprehensive public schools. Only 112 of 400 government-funded high schools are allowed to conduct classes in English. These are referred to as English Medium Secondary Schools. Funnily enough these English Medium Secondary Schools are also the best performing government-funded high schools. However, even in English Medium Secondary Schools, many instructions to students are given in Cantonese.

Therefore comprehensive public schools are not an option for someone seeking future study in an Australian university (which is taught in English).

Public High Schools - Australia

In NSW, there are public high schools which are Selective High Schools. The students who attend these type of public high schools must pass a Selective High School Placement Test when they are in Year 6 and therefore must be of high academic ability if they are offered a place. There are 3,533 vacancies for Year 7 in Selective High Schools and each year there are approximately 13,336 applicants. This represents a 26.4% chance.

In 2009, the top 5 Selective High Schools that accept boys based on their minimum entry score were:

1) James Ruse Agricultural High School (241/300 - 80.3%)

2) North Sydney Boys High School (223/300 - 74.3%)

3) Sydney Boys High School (219/300 - 73%)

4) Baulkham Hills High School (216/300 - 72%)

5) Fort Street High School or Normanhurst Boys High School (213/300 - 71%)

Why choose a Selective High School? For example, 50% of Year 12 students at James Ruse Agricultural High School accept university places for studying medicine and law.

Therefore attending a Selective High School is not a difficult choice to make. It is far cheaper than attending a private high school and your child has a far higher chance of being admitted to an Australian university course with a high cut-off entry mark than if they attended a comprehensive public school.

A home in Hong Kong

Following my own advice set out in the post Take advantage of Hong Kong, I purchased a semi-detached dwelling in Yuen Long, New Territories on 1 September 2009. The townhouse was completed in July 2009 but I am a second hand buyer (so unfortunately I must stamp duty whereas the first owner did not). I paid 0.99% higher than the first owner. It is a gated community and provides excellent security and new facilities like gym, gardens/parks, clubhouse and pool. The townhouse has a GFA > 2800 sqf. We elected 60 days for completion.

Transport Options

The MTR station is 1 km from the estate. There is a free private shuttle bus that runs to the MTR station and Tai Lam Tunnel bus intercharge from the estate every 30 minutes.

Alternatively can also catch two public buses, the KMB 54 and KMB 77K which stop in front of the estate on Kam Tin Road, which come every 5 - 10 minutes.

You can catch or you can drive to the MTR station (Park N Ride at the MTR station for HK$20 all day) or catch a taxi to the MTR station. It takes approximately 27 to 35 minutes by MTR to get to Central.

If you drive all the way, it will take 30 minutes to get to Central by taking the Route 3 highway. The two tolls add up to $75 one way.

Financials

Now the numbers ...

Purchase price: $7.5m

Stamp duty: $281,250

Agent's Commision: Nil

Solicitor's Fees: Nil

70% loan from bank: $5.25m

Interest rate: 2.1% for deposit-linked mortgage

Loan term: 40 years

Cash Rebate from Bank 1%: $52,500

Monthly repayment: $16,176 (interest component is $9,187.50)

Monthly management fee: $2,078

Fire insurance: Nil (estate has master policy)

Government rate: $534 (3% of rateable value)

Monthly expenses (not cashflow): Interest + Monthly management fee + Government rate

= $10,375.33 and dropping as interest component slowly reduces

In comparison, my current rent is $27,000 for GFA of only 982 sqf.

The property needs to appreciate by at least 2.36% per year over the next 4 years for me to live for free (i.e. cover the capital costs such as stamp duty, and ongoing costs such as interest and monthly management fees).

If the property appreciates by 17% in the next 4 years as expected by many analysts for the HK property market in general, then this equates to a 4% compound annual growth rate. The total cash used was $1,812,671.72 in the 4 years and the gross capital gain is $1,275,000. The compound annual growth rate of cash that has been used is 14.24% which is just a bit less than Warren Buffet's target of 15%.

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

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.

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.