Lessons from Hong Kong for the Dubai real estate crash

A useful although not exact parallel can be drawn between the Asian Financial Crisis and the Hong Kong property crisis post 1997, and the crash of the Dubai real estate sector since the global financial collapse last September.

Hong Kong in the early 90s was the hottest real estate market in the world. The city state boomed in the run up to the handover of power from the colonial UK with a huge investment by the local government in infrastructure – particularly a magnificent airport and associated roads, bridges and railway – and massive private investment, especially in stocks and property.

1997 bubble

This became a gigantic bubble that popped with the Asian Financial Crisis and ended with real estate prices down 70 per cent when the market bottomed during the SARS health crisis in 2003. By the middle of 2008 prices had recovered to a 30 per cent decline but have slipped back in the global recession to below 35 per cent down on 1997.

What made the 1997 housing recession so deep was actually a Hong Kong Government decision to carry on building new housing units despite the impact of the Asian Financial Crisis. This rising supply of new housing dampened demand further and kept rents down, prolonging and deepening a cyclical downturn in the sector.

Not surprisingly the Hong Kong Government has learnt its lesson, and is being far more restrictive in releasing land for development this time around. In 1997 households were also highly leveraged which made the downturn very painful.

Cash market

Households too have learnt their lesson, and have been far less willing to take on debt, even with mortgages locally at 2.5 to three per cent. The market remains one mainly for cash buyers in fact.

Rental yields have recovered from their lows of the crisis years in Hong Kong, and are presently at a seven year high of five to six per cent gross and 3.5 to four per cent net. That gives landlords a return above what they would get in a deposit account but does not encourage property investment.

So what lessons could this experience have for Dubai? Well, it certainly suggests that the continuation of building programs into the downturn since last September could prove an awful mistake with negative consequences for prices and the health of the market going forward.

Home loans

It also suggests that hoping that low cost home loans will revive the market at some stage may not work. The Hong Kong experience shows that people who are frightened stiff by falling prices do not then rush into buy even if mortgages are cheap.

In addition, the idea that prices just have to recover to previous highs quickly just does not stack up. In Hong Kong 12 years after the handover from the UK house prices are still 35 per cent lower than they were then. Nobody would want the British back but these were the golden years for property speculation.

You could argue of course that Dubai house price levels never got to the absurd levels of Hong Kong in 1997, and that is a fair comment. Hong Kong is also a very different market with a long tradition of home ownership and a restricted supply of property managed to keep prices high. Dubai is a new market dashing for growth at any cost. Its population is also largely expatriate.

However, both cities are regional trading, logistics, tourism and financial centres. That if nothing else justifies relatively high property prices in such cities. But it does not stop the rules of supply and demand applying to the real estate sector.