The Messiah
You are correct - you do need to be intelligent about it. But how do you know when to buy and how much to pay?
Those that bought in 1996 and 1997 are still waiting to break even on their purchases. The best time to buy is when doom and gloom is greatest - after 1989 Tianenem square, or 2003 after SARS. Of course I only know that with hindsight - after the Asian Contagion looked like a good opportunity but prices continued to fall for another 3-5 years after that.
The best way to decide to buy or not is to do a 'what if' analysis and see if you can live with all the potential outcomes. Obviously if the property rises or stays at the same price you will make money over time. But unfortunately the HKG market has been more volatile than most and there have been multi year periods of falling prices.
A NC 'what if'
The assumptions.
Purchase price $9.6M
Stamp Duty/purchase costs $400K
Average Interest rate 5%
Housing Allowance $67K/month
Management fees/Gov rates+rent $60K pa
No repairs!
Tax 15%
Borrow 100% of property value and purchase costs (this allows for the opportunity cost of having your own money tied up in the property)
Monthly cash flow
Income $67K
Costs
Interest $41,667
mgmt/gov rates $5,000
Tax on Inc $10,050
Excess of income over costs
$10,283
So over 6 years you will have paid off close to a million. So from owing $10million on a $9.6million property you will now owe about $9million.
So as long as Hong Kong property doesn't go down by 7% you will make some money.
What ifwe have a repeat of 1997 - lets say prices fall 50% over 6 years ( I think the actual price fall was between 60-70%). You will be in negative equity of around $4million. Remember that in 1994 onwards it seemed like a sure bet buying HKG property as it had been rising for five years, since 1989. And here we are today with a sure thing in that prices have risen for five years since SARS.
No one I know can predict the future so not trying to predict a decline. But do your analysis based on all possible outcomes and make sure you are happy with all outcomes. If you buy for $10million then in 6 years a 10% decline in property will have cost you money overall!
Note. If you bought a $4.8m place using the same assumptions then after 6 years you would owe about half - so much safer bet. But good luck finding a place you want your spouse and kids to live in for around $5m!