Wealth Effect

August 15, 2007

Despite the recent roller coaster ride of the worldwide stock markets, Hong Kong luxury residential market recorded steady growth in both transaction volume and price movement in recent months, as some prudent stock investors were quick on the mark to take profit and move to property market.

For some luxury properties that had previously experienced sluggish sales, the pace of sales has picked up. In one prominent high-rise super-luxury building completed last year, sales volume in the recent four weeks is 80% of the total sales in the last 12 months. It is not surprising that the stock market has brought about a "wealth effect", which results in investors seeking alternative investments. As is well known, the high end residential market has a chronic shortage of supply. The problem is becoming more acute as the upper classes, whose wealth has inflated on the back of a strong economy, are upgrading their living accommodation or are making property investment to spread the risks in equity markets.

Despite this bullish outlook, the liquidity problems arising out of the subprime mortgage market in the U.S. have repercussions worldwide, causing grave concerns among states and governments. Last week, several major central banks had joined hands in injecting new capital to the banking system in an effort to stem the credit squeeze. It is still too early to assess the full impact of this financial trouble on local property market, as the problems surfaced so far may be just the tip of the iceberg. But already local and regional stock markets have become jittery on any bad news coming from the west. This has prompted some investors to leave the stock market and head for the property market. After all, local property market is renowned for its high efficiency, high transparency and high liquidity. However, if the subprime mortgage troubles in the U.S. aggravate to the extent of dampening consumption power, the rippling effect would be a slow down of China's export market, which in turn will cool down the stock markets in China and Hong Kong. What happens next should be closely monitored.

The high end property market in Hong Kong is characterised by its high investment value and a high proportion of investment activities involving international players, so it will not be immune to any adverse effects flowing from the worldwide investment markets. Although we are still confident of Hong Kong

By K S Koh