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The government's cooling measures are doing their job, but the side effects are still unknown

In a January press release, the Royal Institution of Chartered Surveyors (RICS) asserted that the Hong Kong Monetary Authority would be anxiously awaiting evidence of a market slowdown visible in the number of December 2010 mortgage approvals. "The recently released house price index from Centadata shows that prices grew 2 percent in the month to January 9th, and are now above pre-crises levels. The HKMA maintains that speculative buying is a concern and will almost certainly have to act again if the residential market shows no signs of cooling."

They're not alone with threatening continued cooling action; turn on the evening news or pick up a paper and every secretary of every department seems to be saying the same thing. But the cooling measures introduced last year have done their says Ricky Poon, Executive Director Colliers International in Hong Kong. "Transaction volume slowed down a bit after the New Year, even before the budget was announced. Buying mood slowed down and developers also didn't launch their [first hand] projects. After the Lunar New Year there was some activity pickup. Prices are up 3 to 5 percent already, but volume is down 15 to 20 percent."

As Poon sees it, speculation has indeed been curbed, which was the goal of the measures to begin with, as rampant speculation is considered to be one of the root causes of skyrocketing prices. "If you're a speculator you sell within 2 years and you need to profit by 10 to 20 percent. That's a lot of money and you don't expect prices to have that kind of growth in a short period of time," he points out. The loathed stamp duty has merely become a point of compromise between buyers and sellers as to who is going to absorb the added fee. But speculation hasn't been eliminated completely. "For mediumto long-term investors, anything between 2 to 3 years, if there's a unique property and the price is reasonable they'll still buy for investment," Poon states.

The cooling measures were also intended to help end-users, and to that end the news is a mix of good and bad. Though prices are indeed up in the first two months of this year, the 11 percent growth forecast from most major property agencies is being revised down to a more manageable 5 to 6 percent. "When we made our forecasts last year we were talking about 10 percent growth in prices and up to 15 percent in rents. Agencies like Midland have already revised their forecasts down," explains Poon. If that's the case then we've already hit the mark, if only in theory. "The room to grow [any more] this year is small. It will be flat or very steady." Poon thinks that could lead to a wait and see attitude that favours buyers. "We'll see new supply in the next 3 to 5 years. Within a year or two there won't be enough, but after that there will be in the mass market. So the mood is that there's no rush to enter the market." As long as purchases remember the fundamental of affordability, again the cooling measures have done their job. But, "If rates go up we're not talking about 50 to 100 basis points; they're talking at least 200, maybe 300 points. So mortgage ratios go up. Now it's below 50 percent and if rates go up and the ratio goes up to 60, that's a signal. Then you get everybody needing to sell. And if everybody needs to sell and starts cutting prices you know what happens."

And that's what has Poon most concerned - the rumblings from the banks and talk of increased interest rates. As of the beginning of March, "What I've seen in the last two weeks, and this has been an alert for me, is the banks' attitude. It's changed. They've stopped lending, especially Hang Seng, with the HIBOR-plus," says Poon. Citibank soon followed and then the rest. "Normally it's HIBOR plus 0.7 percent; now it's up another 50 basis points. So it's HIBOR plus 1.2 percent or more. And for companies using the property hold they probably prefer to prime-minus instead. When we start seeing that it means the banks are being cautious on mortgages and trying to minimise their risk." Like many, he believes interest rates could go up as early as the third quarter of 2011. "If rates go up that will be a big signal that prices are headed for a correction," Poon warns. And the idea that with rates so low, doubling or trebling won't be all that agonising is a myth. "The prime rate goes up and the bank will stop doing prime-minus. The discount rate would get cut down to 2 or less. We're looking at 4 to 4.5 percent."

Developers may be seeing the writing on the wall too, as indicated by Cheung Kong's recent sale of Phase 3 of a Shatin development at prices 10 to 15 percent lower than Phases 1 and 2 ($9,000-10,000 per square foot). As Poon theorises, "They just want to get rid of the stock. I think you'll see that more and more. I think it's the first signal from developers, not being so aggressive. But they're still making a lot of money."

So it's mission accomplished for now as long as buyers - who don't want to wait and see where the market goes - brace for rate hikes and keep a firm eye on what they can afford. One thing's for certain however. Like most cures, the cooling measures may have done trick but the side effects are unpleasant at the very least.