The forecast for the Hong Kong property market is positive, in the short-term at least, although growth across all sectors is slowing down. Alex Frew McMillan reports
One of the engines of the US economy, rising home prices, has broken down. Britain, Spain and other European markets are stalling. But it seems that Hong Kong property is still revving, even if demand is in neutral.
In fact, if you talk to the market forecasters, you’ll find there is still gas in the tank – they are expecting Hong Kong property prices to rise in the second half of this year.
Colliers recently cut its forecast for residential property price increases to between 5 percent and 10 percent over the next 6 to 12 months. But that is still a respectable pace. The company expects rents to rise even faster, predicting a 15 percent increase over the same timeframe.
So are the property experts selling us a dodgy motor, patched up with a little sawdust and oil? Or is Asian real estate really operating differently, cut off from the problems overseas?
Brokers will tell you that things aren’t perfect. The rush of buyers who were walking through the door last year and especially at the start of this one has dwindled. “It’s definitely a buyer’s market, that’s for sure,” says Ricky Poon, the executive director of residential sales for real-estate consultants Colliers. “The bargaining power is on their side.”
Poon says sellers are still being a little unrealistic with their pricing, expecting a premium of up to 15 percent for a property, over recent similar transactions. You can get that in a strong market. But Poon thinks vendors need to scale those expectations back under today’s conditions and should be happy if they get a premium of 5 percent. Now is not the time to be greedy.
Brokerage Ricacorp reports that sales in the secondary market hit their lowest level in a long time at the start of July. If you count out the Lunar New Year holiday week, when business is always slow, the number of transactions for the first week of July was the lowest in 45 weeks, almost a year.
“The number of buyers is falling,” says Eddie Chan, a broker with Remax Realty in Sai Kung. “It is definitely slower.”
But prices have not fallen. In fact, the stats show prices for luxury properties climbed a little more than 10 percent for the first half of this year. Mass residential was a little slower but only slightly – showing gains of around 9.5 percent.
Sentiment has shifted, there’s little doubt about that. Perhaps it’s the weather; and the plummeting stock market doesn’t help. Ask around, and the “man on the street” already thinks prices are falling. Actually, they aren’t.
“Market sentiment has been affected,” says Simon Lo, the director of research and consultancy at Colliers. “It’s either the local stock market or the China stock market – both are down. So the sentiment is not that positive right now for most prospective buyers.”
If the gloom continues for long enough, it could become a self-fulfilling prophesy. But so far, the market is just taking a breather.
“Why then has the number of transactions contracted, while the average unit price is going up?” Lo asks. “It is because the fundamentals are still very positive.”
Banks in Hong Kong have started raising interest rates, and they aren’t offering particularly attractive terms on new mortgages. Some even seem to be sitting the summer out, setting their mortgage terms so low that they are essentially saying they don’t want any new business.
But Hong Kong still has negative interest rates, and negative mortgage rates, meaning the rate of interest you will pay on a mortgage is lower than inflation. As long as that continues, it is a no-brainer to own property.
“Even if you get a 100 basis point rise in the next 12 months, Hong Kong is going to see sustained negative interest rates for some time, which is the basic factor underpinning the market,” Lo says.
So why all the negativity?
Cynics suggest that brokers in Hong Kong have simply changed their strategy. One real-estate source who did not wish to be identified, says brokers have stopped “talking up” the market given the shift in sentiment and are talking it down instead – hoping to attract bargain hunters.
The low level of transactions is of course very bad news for brokers, since they make a commission on every sale.
“They can’t do any business, so some of the agents have changed their strategy,” the source says. “They start to pass the message everything is going to fall.”
Maybe the realtors are just ahead of the game. There is no doubt that real estate is in trouble elsewhere in the world. The US may not technically be in a recession – yet. But plenty of people are feeling its pain.
A report ‘Money Into Property’ released by DTZ at the start of July showed that direct real-estate deals around the world fell 50 percent in the first half of 2008, compared to the same time last year.
David Green-Morgan, the Asia Pacific research director at DTZ, forecasts that the figure for the year will be US$500 billion, down 30 percent over 2007. But the company’s survey shows that 62 percent of big institutional investors plan to boost their allocation to real estate, with Asia their favourite region.
“With the possible exception of Japan and, to a lesser extent, Singapore, the impact of the global credit crunch on the investment markets in the region has been fairly muted to date,” the company said in a release.
The survey reveals that 56 percent of all respondents plan to increase exposure to Asia Pacific real estate [against only 15 percent wanting to reduce it], with China remaining the primary area for investor interest, while there was some shift in focus away from Japan, Australia and Singapore in favour of emerging markets such as Vietnam and Indonesia.
This doesn’t sound too bad. More money from investors with billions to put to work is very positive indeed. And while terms like “negative mortgage rates” may be boring to you and me, they are sure to perk up the ears of money managers whose year-end bonus depends on using that money well.
In fact, DTZ suggests, the Hong Kong property market hasn’t stalled all that much. The number of Sales and Purchase agreements signed in May was 10,329, down 7.4 percent from April, and down 40 percent from January, but that was when the market was on fire.
But May marked the fourteenth straight month that there were more than 10,000 property sales, the longest run since the property bubble in 1997. If you count that out, it’s a streak that hasn’t been seen since 1991.
“It was the most active first half of any year since 1991 if we take out the over-speculated year of 1997,” says Alva To, DTZ’s head of consultancy for North Asia. “In spite of a consolidation period in March and April that was longer than expected, the half-yearly high transaction volume proved that a solid and sustainable demand exists in the market.”
Take Taikoo Shing. Prices for apartments there climbed from an average of HK$7,000 per square foot at the start of the year to HK$7,700 per square foot in May. And they are still 9.1 percent below their record from September 1997, of HK$8,466 per square foot.
Or look at Dynasty Court in Mid-Levels. A flat in that luxury development cost HK$16,500 per square foot last December but was costing HK$18,000 per square foot in May.
The collapse in the China stock market and the pain in the Hang Seng Index have probably stripped out the “hot money” that was floating around last year. So demand is down.
But Hong Kong developers are still not building a particularly large number of new apartments – there are 12,670 new flats expected on the market in 2009, and the average this decade is 20,356 – so the other part of that equation, supply, isn’t going up either.
Experts like To are watching the stats carefully. Looking at Taikoo Shing again, he notes that the price may still be 9.1 percent below its 1997 level – but it was 37.4 percent below that level in January 2007. Wages are not rising nearly as fast – the median monthly income in January 2008 was HK$18,000, 10 percent off the 1997 peak of HK$20,000, and in January 2007 it was 15 percent off the record.
“Such a big difference in paces of increase would usually have severe impact on the affordability of buyers,” To notes. But affordability hasn’t changed dramatically because interest rates have fallen, meaning mortgage payments have gone down.
Higher interest rates would hurt. But they aren’t likely for a while. In the meantime, it is the high rollers in the stock market who are feeling the pain. Investment bankers won’t be putting a deposit on quite so many Maseratis when they get their bonuses this year.
We can expect bumps in home prices that are driven by the stock market. “However, as a low interest rate remains, and based on the economic fundamentals of Hong Kong, we maintain an optimistic view of the short-term development of the market,” To says.
Of course, when the stock markets hit hard times investors turn to property. With the majority of large global institutional investors looking to Hong Kong and Asia, coupled with exceptional interest rates, the forecast is still good. Whatever that broker tells you.