Would you pay more than twice the average price of a new home in the US for a parking spot in Hong Kong?
It sounds crazy. But recently, someone did.
Let me explain…
According to the Office for National Statistics in the UK, the median house price in England and Wales in the third quarter of 2016 was GBP215,000 (US$275,000).
The median house price in London, England’s capital city, and the most expensive major UK metropolis area was GBP435,000 (US$554,000).
Across the pond in the US, the median sales prices of new houses sold in April of this year was US$309,000, according to the Federal Reserve Bank of St. Louis.
But here in Hong Kong, a parking space just sold for US$665,000 (HK$5.18mn).
Yes, you read that correctly. A single car park space. Somebody just paid over TWICE what the average new home costs in the US – for an empty patch of concrete measuring around 10 feet by 18 feet where they can put their car.
If you’re thinking the car park was located in a prime area of downtown Central – Hong Kong’s main financial district where car parks are few and far between – you would be wrong. (Not that that would justify the price.)
It was located in a new residential building towards the west of Hong Kong island in an up-and-coming area, although not known for luxury residential developments. It’s a district where you can buy a 400-square foot fixer-upper apartment for around the same price.
According to the Census and Statistics Department, the median annual household income in Hong Kong is US$48,300. So the parking space cost nearly 14 times what the average household makes in an entire year.
How did this happen?
These kinds of prices are possible only if money’s too cheap and there’s too much of it.
That means interest rates are low (i.e. it’s “cheap” to borrow money), and there’s a lot of money sloshing around the financial system.
Take a look at the following charts below. I know it’s a big stack of charts, but there’s a single line that ties them all together, the Global Financial Crisis (GFC).
In the top chart, we have the historical Fed interest rate, which is the rate at which banks and credit unions in the US lend reserve balances to other depository institutions overnight. This is mapped alongside the three-month Hong Kong interbank lending rate (or HIBOR). This is the rate at which banks lend to one another in Hong Kong dollars for three months. This is also the rate on which most Hong Kong mortgages are now based.
You’ll notice that Hong Kong tracks US interest rates very closely.
(Why is that? The Hong Kong dollar is pegged to the US dollar. This means that Hong Kong “imports” US monetary policy. Because the Hong Kong Monetary Authority (the equivalent of the Federal Reserve) is tasked with maintaining the peg, it means that Hong Kong must follow US interest rates. Otherwise, traders would arbitrage (take advantage of the difference in price) the currencies and make riskless money. I’ll explain this in more depth in the P.S. at the end of this article.)
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The middle chart shows the balance sheets of the four major global central banks; the Fed, the European Central Bank (ECB), the Bank of Japan (BOJ) and the People’s Bank of China (PBOC).
The chart shows the total cumulative balance sheets in billions of US dollars.
You’ll see that prior to the GFC in 2008-2009, the total assets of the big four central banks was around US$6 trillion. Since then, the collective asset base has doubled to US$12 trillion. Huge amounts of money have flooded into the global financial system. And this money has come with a record (and persistently) low-interest rates.
The final chart shows the Hong Kong property price index. It’s more than doubled in the aftermath of the global economic crisis.
In short, money is cheap and there’s lots of it. That’s pushing up prices of assets like houses.
What does that have to do with the price of a car park?
Whilst the GFC might be long forgotten in certain circles, the aftershocks of this colossal monetary experiment are still reverberating around the world today, seven years on…
When assessing the “value” of a car park space, we start by looking at the yield. This is simply the annual “rent” divided by the price.
Ideally, we want to be buying at a higher yield. In other words, I want the rent I could receive for this real estate asset to be as high as possible in relation to the price I pay for it.
The higher the price you pay, the lower the yield becomes.
Now, let’s take a look at this parking spot.
In this particular area of Hong Kong, I estimate the monthly rent of a car park space would be approximately HK$3,000 (US$385) per month or HK$36,000 (US$4,645) per year.
So, with that in mind, if we were going to buy this car park space we would plug in our target yield, and then back out a price accordingly.
Let’s say we want to receive the 10-year US Treasury rate (2.15 percent), plus an additional 1 percent of extra return (because, this is a car park, not a sovereign bond – I need a little extra yield for the risk).
Our desired yield is therefore 3.15 percent. And assuming an annual rental as above, our offer price is calculated as HK$36,000 divided by 3.15 percent.
This gives us a price of HK$1.14mn (US$147,000)…
That’s what a vaguely sensible price should look like, not HK$5.18mn.
But here’s the problem. Take a look at the table below. This is what you earn for keeping your cash in the bank at HSBC in Hong Kong. For a HK$1mn-plus fixed term deposit, you’ll earn just 0.20 percent annually.
Like I said, money is just too cheap. That means you don’t get any interest for holding cash, and it’s cheap to borrow.
And when money is cheap and there’s lots of it (refer back to the charts), then what happens? Asset prices skyrocket.
The historical average Hong Kong dollar three-month HIBOR rate going back to 1994 is just under 3 percent.
Today, it’s still just 0.74 percent. So, this kind of asset price madness continues…
But yesterday, the Federal Reserve raised interest rates. And today, the Hong Kong Monetary Authority followed suit and boosted borrowing costs by 25 basis points (or 0.25 percent) to 1.5 percent.
At some point, rates will rise again… and again. And one day, in the not too distant future, this particular car park buyer might look back and wonder what it is they were thinking when they bought this patch of concrete for a 0.69 percent yield (i.e. annual rent divided by purchase price 5.18 million).
Good investing,
Tama
P.S. The reason why Hong Kong “imports” US interest rates is because of the currency peg. To illustrate, assume that the Hong Kong dollar is pegged 1 HKD = 1 USD.
If US interest rates were 5 percent and Hong Kong interest rates were 1 percent, it would allow traders to borrow say 100 HK dollars for a year and pay a low interest rate (1 percent), then convert the HK dollars into 100 US dollars, deposit it with a bank and receive a high interest rate.
After a year, they would get their 100 US dollars back plus interest (5 percent), and then convert it back into HK dollars at the same exchange rate and pay their 1 percent of borrowing cost.
Effectively, they’d have 4 percent of riskless money, backed by the Hong Kong government.
