Posted by Leonard Steinberg on October 28th, 2013

Hong Kong is seeing signs of the effects of what I call LUXOFLATION…..the inflated inflation of pricing on the very high end of the real estate market. The frenzy to buy real estate in Hong Kong is significantly more crazy than Manhattan’s recent flurry of activity: A new project developed by New World and Wheelock & Co. in the Kowloon West area, sold all 185 units within seven hours after they were put on the market 2 days ago, Sing Tao Daily reported yesterday, citing the developers. The units were sold at average prices of HK$22,000 ($2,837) to HK$24,000 per square foot. Pricing has more than tripled in Hong Kong in the past decade, mostly fueled by the tremendous growth in the region.

Since 2010, Hong Kong has introduced a raft of measures, including extra property transaction taxes and tighter mortgage-lending requirements, to damp prices and avert a housing bubble. Total residential transactions in the first half fell to the lowest since 1996, another sign how governments can suppress markets. One has to hope that the next New York mayor Bill de Blasio realizes that his aspirations for more affordable housing don’t kill the cash-cow that is new condos: each one of those pesky luxury condos built delivers lots of jobs, huge transactional fees and raised real estate tax revenues. Affordable housing will not deliver any of those positives for the economy.

Some are predicting that housing prices in Hong Kong could drop as much as 25% due to over supply, rising interest rates and government interventions. Some in the USA worry that the large chunks of properties bought by Hedge Funds have artificially boosted pricing.

A Manhattan ‘first’: In a rather aggressive move to dissuade investors, (or possibly cash in on their potential gains?) the Rudin’s at GREENWICH LANE placed in their offering plan a requirement that if a buyer sells their apartment within 12 months of closing they have to share 50% of the profits with the developer! Many developers are discouraging investor buyers, yet many are not. The more speculative the market is the greater risk of a Hong-Kong-style adjustment. The more governments intervene (foolishly)in the housing markets, the greater risk of damage. We are definitely seeing LUXOFLATION in the Manhattan real estate market, but most of it is being tempered now by rising inventories and the promise of more product in the pipeline.