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A look ahead
Due to the strength of the economy, housing shortages and even the U.S. slump, property prices are likely to rise by as much as 25 percent this year. Alex Frew McMillan reports
When asked to predict what will happen in the year ahead, pundits always seem to say that the coming year will be just like the one we've just had, but a little more restrained. It's a safe strategy. Trends continue, after all — until they end!
But things seem a little different this year, with more market watchers going out on a limb to predict very strong performance for the Hong Kong property market in
2008.
"We have turned maximum bullish on Hong Kong residential, and expect residential prices to rise 50 percent by end-2009," Merrill Lynch research analysts Keith Yeung, Paul Yau and Kevin Lai wrote in a November report.
It is a big change from the 8 percent gain they had previously predicted for 2008. And it is a big call — many people are fretting over the possibility of a U.S. recession and what that means for economies all around the world. The slumping U.S. housing market could bring that on by removing the "wealth effect" that has encouraged U.S. consumers to spend well beyond their means.
But they are not alone. Patrick Chow, the head of research at Ricacorp Properties, predicts that home prices will rise 15 percent to 25 percent in 2008, thanks in part to the dwindling supply coming on the market. He expects the number of transactions to go up 20 percent, to 125,000 sales.
Despite several threats, "the market will be much more rosy in the coming year, as the upside forces will be much greater than downside forces", Chow states.
Xavier Wong, the head of research for Knight Frank in Hong Kong, says he expects growth to be fastest in the first half of the year, followed by a slowdown in the second half. But he still expects gains of 20 percent for both "entry-level" apartments of under HK$4 million and luxury units over HK$10 million.
The sweet spot, Wong says, will be mid-range apartments worth between HK$4 million and HK$10 million, which he predicts will rise in value by 25 percent in 2008.
What's behind all the optimism?
The city's strong fundamentals are the driver. The economy is growing well in Hong Kong and rapidly on the mainland, resulting in pay raises for the local workforce.
Wong notes that the jobless rate in Hong Kong is around 2.5 percent for professionals, close to the level of the early 1990s, when there was a labour shortage.
"Professionals have recently regained bargaining power in the labour market," he says. "With the middle-class households keen opinionto upgrade their homes, mid-priced units worth between HK$4 million and HK$10 million are expected to do particularly well."
The improved economics have led to steady gains in property prices but without too much speculative activity. Hong Kong's recovery has even encouraged buyers who were burned in Hong Kong's property bubble — and had just been holding on to apartments showing paper losses — to get back into the market.
"The market is strong at present, with a lot of buyers still looking for good locations for own use," Chow says. "These end-buyers now constitute 50 percent of the demand, and a further increase to 70 percent is likely to be achieved in 2008. The source of new demand will come from the ‘defrosted' end-users who bought property in 1997."
Chow says around 30 percent of the current buying activity comes from private investors, particularly large institutions, which are looking for places to park their money for the next two to three years. They are encouraged by the weak Hong Kong dollar, which makes Hong Kong property look cheap. Some investors looking to get into the China market have had to find a substitute destination for their money after China toughened its real-estate policies.
"The final 20 percent of the demand is filled by private investors looking for short-term windfall gains, and this group will tend to play a lesser important role next year," Chow said.
Dwindling supply set to buck prices
But the city's property market has a double whammy that doesn't just depend on wage gains and economic growth.
The Merrill analysts say Hong Kong residential property is at the beginning of a "structural housing shortage," stemming from low land supply on the government side. That is hitting at the same time that demand is rising significantly from buyers; a cyclical trend.
For the first three quarters of 2007, there were 4,400 private residential units completed in the city, according to Knight Frank. That was down 64 percent from the same time the previous year, when 12,100 new units were built.
With the government under pressure to preserve both heritage sites and the environment, and looking for high prices on land sales, the supply will likely remain tight.
So while demand is being driven by the city's fluctuating, and currently strong, economic fortunes, the supply is tight thanks to a more systemic and long-lasting cause.
"Local confidence in the residential market is restoring on increasing buyers from the mainland, strong local economy, high job security, rising housing income and buoyant stock market," the Merrill report says. "The structural housing shortage and a cyclical upturn in housing demand, together, is a powerful catalyst for sharp residential price increase, in our view."
It's a good question whether such rapid price increases are good for the market overall. Developers are likely to hold onto residential projects for longer and resist selling them at "cheap" prices, further restricting supply. The housing demand looks set to outstrip supply by a long way at least until 2010, and perhaps longer.
But by the end of 2009, even despite that 50 percent jump, prices would be 11 percent below their peak from 1997, according to Merrill. Housing affordability has also improved since then, thanks to better wages and lower borrowing costs.
U.S. recession set to impact positively
The U.S. housing slump has, perversely, so far been good news for the Hong Kong property market. Thanks to the Hong Kong dollar's peg to its U.S. counterpart, banks here have followed the Federal Reserve's lead, with a cut in mortgage rates in September and two in November, for a total drop of 0.75 percent in the best lending rate.
It doesn't sound like a lot on paper, but those lower rates reduce the cost of borrowing significantly. And at the end of 2007, Federal Reserve chief Ben Bernanke was making noises about the likelihood of further cuts.
The prime lending rate in Hong Kong (that most mortgages are based on) had fallen to 7 or 7.25 percent towards the end of the year, down from 8.1 percent in 2006. Wong at Knight Frank predicts it will fall to 6.5 percent in 2008 thanks to more Federal Reserve cuts.
Hong Kong has gone belly up thanks to a U.S. recession before, of course, most recently when the dot.com bubble burst on Wall Street and spread about nine months later to Asia. So the fact that the Federal Reserve is so worried about the U.S. economy should certainly be cause for concern. The U.K. housing market is also starting to slump.
But the weak U.S. dollar makes Hong Kong's goods and services cheaper for companies overseas. It also drives up the cost of imports from China and causes inflation. Real estate is typically a very good hedge against inflation, particularly at a time of negative savings rates, when the amount you'll make by putting your money into savings accounts at the bank will essentially see you lose money in the long run.
The low interest rates and the weak dollar are likely to lure speculators back into the market, according to the Merrill Lynch guys. They note that the last structural housing shortage ran from 1985 to 1997, when the handover agreement, the Sino-British Joint Declaration, restricted the amount of new land for residential property to 50 hectares per year. It resulted in a mammoth 720 percent increase in residential property prices.
So hold onto your hats. 2008 could be an exciting ride.
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