Viewpoints

Is Hong Kong experiencing a bubble? A Discussion of the drivers affecting Hong Kong residential property prices.

Posted on August 13, 2012 in Viewpoints by admin

By William Young

In the first half of 2012, Hong Kong has seen property prices on the rise with strong sales of new supply amidst the further deterioration of the global economy, leaving people wondering what is impacting property prices currently, whether Hong Kong is experiencing a bubble, and when the right time to buy in the market is.

To understand the property market and future outlook of the likely pricing trends, lets take a look at the factors that affect the markets, which broadly include global, regional and Hong Kong macroeconomics, demographic trends, government policies, and market behavior.

The global economy has continued to be challenging since the turn of 2012, with the deterioration of the Eurozone, weak recovery of the US, and slowdown in the growth of theAsiaregion.  All these are leading many economists to forecast another serious global financial crisis that can be as bad or worse than that of 2008.

The Eurozone debt crisis continued in 2012 with Greece which was on the brink of bankruptcy, followed by a period of time of failure to form a government, and worse of all, was looking to exit the Euro – a move that could have potentially caused turmoil in the Euro zone, potentially causing a domino effect that would break up the Euro, leading to years of recession and an unwinding process that would be a nightmare.  Next came the debt crisis in Italy and Spain, that led to a bailout in the sum of 100 billion Euros.  The European Summit 2012 started with a standoff whereGermany initially refused to come to the table on any Eurozone resolution plans. Nevertheless, it showed some flexibility in the end and agreed on a direct bank recapitalization scheme which should help to control the debt crisis.  More recently, the European Central Bank (ECB) has also reduced its interest rate in hopes of stimulating the Eurozone.

Despite all the efforts thus far, the issues in the Eurozone are likely to continue as the key issues which center around the need for policy reforms far extending beyond the Euro currency, such as the impossibility to have one common currency without common governmental policies, have yet to be dealt with. The other major issues in the Eurozone is not just debt but a combination of demand, productivity, household confidence and consumer spending, none of which have been addressed. We have seen some glimpses of civil unrest in 2012, and can only hope that it does not worsen.

Next we turn to theUS, where significant slowdown in economic recovery has been seen, as indicated by worsening jobs reports. In the month of May, only 80,000 jobs were added to the economy that needs at least 200,000 for a continuous healthy recovery.  Although housing sales have shown slight improvement, many economists are predicting that the US may head back into a recession. Despite the US government’s effort in exploring the idea of another round of quantitative easing, there are worries that these would have reducing positive impact on stimulating the economy.

Finally in the Asia region, we have seen month after month downward revisions to gross domestic product (GDP) forecasts for most Asian countries, including those of China and India, as well as a slow down in the growth rate of purchasing managers index (PMI) figures showing weaker production and export demand caused somewhat by the Eurozone and US markets.  Seeing further slowdowns, China has realized that a further stimulus package like the one implemented in 2008/09 may have less impact since it is becoming more difficult to identify infrastructure projects that could benefit from these measures.  Instead, they have resorted to reducing bank reserve requirements, cutting interest rates, and relaxing foreign investment requirements in an attempt to stimulate the economy.

On the whole, the above has resulted in continued negative sentiment in the global markets and reduced investment activities in property across the globe.  In some countries in Europe, and parts of Asia Pacific, we are continuing to see softening of property prices which may in turn present buying opportunities.

Albeit the continuous downturn of the global economy, Hong Kong property prices on the whole in 2012 have seen a rise thus far.  In understanding this, let’s look at some of the fundamental factors that are driving this.

Firstly, Hong Kong’s economy continues to be relatively stable, driven by the fact that it consistently ranks in the top 5 as a financial centre.  In 2011, Hong Kong was ranked number 1 for the first time in the World Economic Forum Financial Development Index overtaking the US and UK.  This unique position continues to attract global multinational corporations (MNCs) to set up regional offices or global headquarters in Hong Kong. Recently, General Electric (GE) has selected Hong Kong to be the new location for its global headquarters.  This trend along with a number of large IPO listings such as Prada and GAP Inc, will continue to contribute to Hong Kong’s population growth, creating more demand for property.

Interest rates inHong Kong are at a historical low, currently in the range of around 2.10% – 2.8%.  This is due to the fact that Hong Kong’s money supply is more closely linked interbank offer rate in the US where interest rates are at an all time low.  This has led to cheaper cost of borrowing money, helping to strengthen property purchases as many buyers now find servicing a mortgage cheaper than paying rent.  In May, the amount of loans drawn down increased by 11.6% over April according to data from the Hong Kong Monetary Authority.  Buyers are often concerned about the interest rate movements and forecasts in the future as interest rates may move during the term of the mortgage depending on changes to the prime rate or Hong Kong interbank offer rate (HIBOR), which is not always easy to forecast.  However, considering the global andUSeconomy, and the time likely needed for a full recovery, it would seem unlikely for the interest rates to increase in the next 2 to 5 years.

Hong Kong continues to see stable rental fundamentals in the residential property sector driven by steady population growth, limited land supply, and changing demographics where younger generations are becoming more career-minded and starting families at a later age.  In addition, some home owners have adopted a speculative strategy of selling their properties and reentering the rental market, in hopes that property prices will plummet before buying again.

Thus far in 2012, we have seen relatively strong property sales data especially in the new property market for developments marketed at a reasonable price range.  More recently, Cheung Kong sold over 200 units in one weekend of its new development in Tseung Kwan O.  The secondary market has been slightly weaker in terms of sales.

The Hong Kong government led by new chief executive, Chun-ying Leung whom was sworn in on 1 July 2012, has on its agenda amongst other matters, the need to improve the quality of life and housing affordability for Hong Kong residents.  For many years, the government has been criticized for the widening wealth gap between the rich and the poor.  Hong Kong now has the largest wealth gap in the world amongst developed cities according to Hong Kong’s Census and Statistics Department.  In addition to this, ordinary Hong Kong citizens complain that houses in Hong Kong are not affordable, as the prices have been soaring at a much faster rate than that of salary increases; on average it would take 10 years to save up the deposit alone.

Although the government is currently working on strategies to address these, the current plan appears to focus on increasing affordable housing supply in selected areas in the New Territories and other less densely populated areas.  Given that causing a downturn in the property market would not be in the interests of the newly formed government, these strategies are not likely to cause a plummet in the property market overall.

There are many factors beyond what has been included in this article that affect property prices, including location, intended use of property, personal preferences, speculation, intended length of ownership and buying decision process. These can all vary widely between buyers, resulting in a different “right buying time” for everyone.

Although no one has a crystal ball when it comes to forecasting property prices in the future, from looking at the above and other factors, it may seem that the global economy can expect to remain weak or deteriorate further in the second half of 2012, with a possibility of this extending to 2013, causing downward pressure on property prices.  The unknown is whether the global economy may fall back into another global financial crisis as seen in 2008, which would certainly cause a steeper drop.  Property prices generally run in cycles, so it is possible that we may see some readjustments in the market from time to time.  However, for a medium to long term view, it may be reasonable to expect that Hong Kong’s residential property market will continue to experience steady growth.

William Young is a Senior Project Director for a listed corporation in charge of content and analysis of the Asian real estate markets, prior to this he spent four years in a private equity real estate fund and has experience in finance and taxation.  William is a qualified Australian CPA.

 

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