|
These articles below can also be found in the 1 - 15 January 2010 issue of Square Foot magazine:
To view the Interactive Squarefoot eMagazine
 |
|
|
On the Bubble
By Alex Frew McMillan
Hong Kong’s property market had a hell of a run in 2009. After the Lehman Brothers’ bankruptcy, there was a lurch downward. But the HSBC rights issue seemed to breathe renewed confidence into Hong Kong investors and property owners. So prices shot back up as much as they had fallen – if not more.
According to Savills Research & Consultancy, prices for luxury residential real estate in Hong Kong leaped an incredible 45.2% over the course of the year. Mass market property showed similar gains and, for once, also participated in the boom.
Now as the calendar flips over to 2010, the fears are of a bubble building in real estate, both in mainland China and in Hong Kong. So are we heading for another pop?
It’s a scary thought, and it seems at the moment that the answer always lies in China which is a strange situation for a Hong Kong that used to always take its cues from Wall Street and the West. The 4 trillion yuan stimulus package introduced in China certainly had a major impact, both directly and indirectly.
“Arguably, yes - it has created some localized asset price bubbles or early bubbles,” says Simon Smith, the head of research and consultancy at the Hong Kong office of the brokerage Savills. “The China stimulus is having an impact well beyond China’s borders. Many of the economies in Asia are depending on China more than they used to.”
Savills predicts that prices for Hong Kong luxury property – the brokerage does not track the mass market – will rise from 5% to 10% in 2010. That’s a much more sedate pace and many market watchers say it is a welcome break. Real estate agents in Hong McMillanKong and in China may need to take a breather.
“I think the word bubble is not appropriate because China can contain that,” Frank Marriott, the brokerage’s senior director of real estate capital markets for the Asia region, says. “But residential is looking a bit toppy at the moment.” Moreover, he adds: “It’s going to be a pretty boring 18 months. Volumes are going to be very, very thin in Asia which is good as the market needs to consolidate.”
The mainland government has already started to rein in real estate prices. Faced with record prices for residential property in places such as Shanghai, the State Council announced in mid-December that it would strengthen rules designed to increase the supply of low- to middle-price housing and boost land supply.
First-time purchases are offered a mortgage rate concession of 70% of the benchmark lending rate if they’re for self-use. It imposed a land tax of 20% of the land cost if plots are idle for more than a year to prevent “land banking” and said that the government might revoke development rights for plots left idle for longer than two years.
There were also some specific measures for Shanghai where residential prices have risen the most. The council stressed that Shanghai should free up more land for sale and require developments to be unveiled all at once or in batches of at least 30,000 square metres at a time, rather than be opened for sale in stages.
The steps taken in Shanghai may be implemented in other cities, so they may have broader significance. But many of the other steps taken, amounted to tougher enforcement of the existing rules.
Colliers International does not expect much tougher action from the government unless property prices get really out of control.
“We note that some of the policy initiatives have been embedded in recent measures,” the brokerage stated. “We believe there will not be further substantial tightening unless the market elevates to a full-blown bubble.”
We’ve come a long way from the end of 2008, when everyone was so pessimistic. The rally in China stems mainly from the stimulus package, which freed up bank lending on the Mainland.
China’s annual rate of economic growth has been seen to have returned to pre-crisis levels. According to Bank of America Merrill Lynch, China’s economy is forecast to grow at 8.7% in 2009 and 10.1% in 2010. It’s a sudden rebound from the lowest point, the first quarter of 2009, when annualized growth fell to 6.1%.
Indirectly, the stimulus package showed that the mainland government was willing to open its huge chests of reserves to support China’s economy. “The state will provide” was the message. That encouraged a rebound in the mainland and Hong Kong stock markets, which translated almost immediately into renewed interest in real estate.
Governments and regulators now have a tough balancing act to maintain. They want to foster the rebound without it leading to excess. And they have no control over the rate of recovery in major markets such as the United States.
“The problem is that the last thing the government wants to do is hurt the recovery,” Smith says. “They would rather struggle with the problem of higher asset values than negative equity. Most governments are approaching any move towards a more neutral stance very tentatively.”
Interest rates remain very attractive. In Hong Kong, the prime lending rate from HSBC averaged 5.0% over the course of 2009, according to Knight Frank, down from 5.3% in 2008 and 7.6% in 2007. That’s likely to stay that way as long as the United States is becalmed, thanks to the pegged Hong Kong dollar.
That should drive continued interest in real estate. We should probably be thanking our lucky stars. Hong Kong, and Asia in general, has been spared the worst of this economic crisis because Asia had a severe debt crisis of its own a decade ago. It is Hong Kong’s steady rule of law and consistent, transparent land-ownership rights that make it so attractive a place to buy in the first place.
Casting back our minds to the fallout from the Asian financial crisis, and the factors that led half a million people to take to the streets in 2003 to demand the resignation of Tung Chee Hwa, you realize that it’s much better to be worrying about the possibility of overpricing than the very real, painful effects of negative equity.
Smith is not too concerned about a bubble growing. “The lesson has been learned from 1998 - people are less highly geared,” he says. The West is coming out of almost a 15-year up cycle. We’ve been up and down a lot since that period. It was not just 1998, but there was SARS, the dot.com boom - lots of ups and downs.
“We’ve been battered around a little bit more and perhaps we are a little bit more battle hardened than other parts of the world.”
Click here for local property listings
|
|
