Reality check for Hong Kong home prices

Sunita Sue Leng: Reality check for Hong Kong home prices

Caution from China

SALES STAFFERS AT Sun Hung Kai Properties must have been busy uncorking the champagne in late October, when the first batch of flats at The Wings, its luxury development in Hong Kong’s New Territories, fetched an average price of HK$12,698 ($2,125) psf. That was easily double the secondary market price of nearby homes.

 

Barely a month after the launch, however, the developer is selling apartments at The Wings at prices that are as much as 30% lower. To be fair, this is not strictly an applesto- apples comparison, as the earlier units had sea views and more bedrooms. Still, it is just one of many signs that Hong Kong’s residential property market could be starting to lose altitude.

 

 

 

Home prices in the territory have been on a tear since early 2009. By June this year, they had run up to a new high, surpassing the last property cycle peak in 1997. In the last few months, however, transaction volumes have started to shrink. By the last weekend of November, home sales in Hong Kong had fallen to a six-year low. Now, prices are starting to ease too, falling a modest 2.5% since early June.

 

 

 

Why is Hong Kong’s property market coming unstuck? Late last year, the government began pouring cool water on the speculative fever that was building up. It slapped on a special stamp duty of 15% on properties sold within six months of purchase. The Hong Kong Monetary Authority also raised the cash down payment required for luxury homes costing HK$12 million or more. On the supply front, the government has aggressively stepped up the release of land parcels. It has also pledged to build more than 17,000 subsidised homes for low-income earners.

 

 

 

More recently, sentiment has taken a beating from stock-market volatility and nervousness about the growth outlook for next year, after Hong Kong narrowly escaped a technical recession in 3Q. Added to this, borrowing costs have been moving up. Since the beginning of this year, mortgage rates have climbed to an average of 2.75% from less than 1%.

CAUTION FROM CHINA

On top of all this, the one unique phenomenon that has fuelled Hong Kong home prices in recent years is starting to falter. Wealthy Chinese buyers have been a major driver of residential property demand, accounting for almost a third of luxury home sales in the territory. Property agents would ferry them over by the busloads to attend new launches and view showflats.

 

During the latest “Golden Week” national holiday in October, however, leading realtors such as Centaline and Midland Realty found they had to halt these once-popular “flat-buying tour groups” from the mainland. Instead, they are now bringing individuals over as and when requested. According to Centaline, the number of prospective Chinese buyers has plunged by as much as half, compared with 1H2011.

 

Sentiment appears to have been dented by the Chinese authorities’ own efforts to cool frothy home prices by, among other things, clamping down on bank lending. Developers have started cutting prices of new launches in some projects by as much as 20% to 30%, triggering angst among those who bought earlier at higher prices. True, the Chinese buyers that come over to Hong Kong are generally flush with cash, but even they are starting to adopt a wait-and-see stance.

 

Yet, we might not have seen the worst of it yet. Hong Kong’s Chief Executive Donald Tsang says that, while transaction volumes have “greatly fallen, prices have not yet fallen to a level... deemed satisfactory”. He adds that the government would monitor the market closely, as it cannot be too careful. “It is still my worry that there could be another bubble being formed,” he says.

 

STOCK MARKET OVERREACTED?

Certainly, stock-market investors feel that property prices in Hong Kong are set for a much sharper correction. Since the start of the year, the share prices of the major Hong Kong developers have underperformed the benchmark Hang Seng Index. On the calculations of Bank of China analysts, the slide in their shares has priced in a plunge of 30% or more in home prices. This would be even more severe than the last downturn in 2008, when residential property prices fell about 25%.

 

Analysts at the Bank of China think this is an overreaction, though. As they see it, home prices are unlikely to correct by more than 15% to 20% this time round. Daiwa Capital Markets is less bearish and expects only a 10% decline by yearend and flat prices for 2012. Both cite the generally strong financial standing of people looking to buy property in Hong Kong. And, even though mortgage rates are beginning to rise, they are still at very low levels.

 

Whatever the case, aspiring homebuyers who have watched prices spiral out of their reach are probably hoping the market will keep falling. On the flip side, homebuyers who recently bought properties — as well as shareholders of property companies — probably feel that prices have already fallen more than enough.