"Until March 27, an increase has been observed in the rental transaction volume of four out of 10 major housing estates in Hong Kong, when compared with last month. The market players predict that the rental market of the other estates in March will increase, compared with that in February." - An excerpt from Vigers Daily News Headlines.

We wonder in amazement when we see that housing costs stop rising when the increase hits 20 percent. The bubble advocates start to say that the market will collapse; the builders feel panic as they get caught riding the wave of economic opportunism and have to retrench.

But the landlords start smiling. Easy money is what got many people into homes. Now harder money and a slow market have resulted in many who considered buying now simply sitting on the sidelines. And since they still need shelter, demand for rentals is soaring. And, surprise, surprise, rental rates are soaring as well.

At its basic level, the relationship between homes and apartments works this way: When money is cheap - amid low interest rates - people are able to buy houses easily.

When it is easy to buy a house, demand for apartments drops. As the housing market booms, that's generally when the rental market goes down. When people can buy cheaply, obviously, why would they pay the same to rent an apartment as buying a house?

Then, two things happened. Interest rates rose, increasing the cost of borrowing. And home values, driven by the frenzied pace of buying during the boom, rose to a level where many people - particularly first-time homeowners - could no longer afford to buy.

"Owner-occupied housing is far less affordable now than it was 36 months ago," according to a Vigers Research report. Because homes are less affordable, more people are turning to apartments, or so the theory goes.

Now, here is the trade secret: When the rental rates get too high, these same folks will see the value of home ownership. The housing gains in the long run up will be locked in due to the perceived value, as opposed to renting.

It's amazing how markets work so efficiently. But don't tell those that are looking for the big blow up. They will be very disappointed.

The author is the managing director of Vigers Asia Pacific.

(HK Edition 04/02/2008 page3)