To buy is cheaper than to rent, a powerful driver re-emerges to invigorate home market (11/04/08)

With the recent spate of interest rate cuts, Hong Kong’s mortgage rates have decreased to near-record low levels again. The phenomenon of “to buy is cheaper than to rent” is gaining ground as rising rental costs exceed the monthly mortgage outlay gradually. (See Graph) What is particularly encouraging is that this scenario will ignite an even stronger boosting effect on the market growth than a similar development between 2001 and 2003.

Price and rental falls in 2001-2003
The phenomenon of “to buy is cheaper than to rent” also emerged between 2001 and 2003 but the situation was markedly different from the current development. Both property prices and rents fell during the previous period against the continuous interest rate cuts. Average monthly rents of major estates decreased by 26.8% from $14.2 per square foot in early 2001 to a low of $10.4 per square foot in 2003. During the same period, average prices dropped by a sharper 31.6% from $2,711to $1,854 per square foot.(See Graph) However, it failed to provide any significant boosting effect to the property market as a result of weak economic performance, high unemployment rate, salary cuts, deflationary pressure and unfavourable government policies.

The momentum of rising sales and leasing values
It is quite a different story for the market situation today despite the fact that local mortgage rates have retreated again to extraordinarily low levels near the historical trough in 2003. The economy saw a healthy growth with inflationary pressure, rising salaries and unemployment rate falling to a 10-year low. Most importantly, the strong rental growth along property price increases has eventually led to a “buy better than rent” development. According to transaction records, the average home price of major estates has increased by 30.6% from $3,194 per square foot in early 2007 to $4,170 per square foot in February 2008. During the same period, average rental also recorded strong increases and grew by 25.9% to about $18 per square foot a month. (See Graph)

Supported by the underlying demand for housing, the current phenomenon of “to buy is cheaper than to rent” has a stronger backing than the situation between 2001 and 2003. The rental yield stands at more than 5% now with a further upside for the leasing rates. The sustained leasing performance is providing a solid foundation for the property sector. More and more end-users probably will switch from leasing to purchasing their own homes under the prevailing conditions while investors will also look for opportunities as a result of the attractive yield.

Residential rents are expected to grow further given the solid economic performance and rising inflation. At the same time, interest rates will stay at a low level and may see more downward adjustments. The prevailing “to buy is cheaper than to rent” development is certain to last a longer period and hence serves as a strong booster to the property market’s future growth.



Feb-2008 data are provisional figures
Source: Midland Research