Correction Underway, But No Collapse On The Cards
BMI View: Hong Kong's property market appears to be the nascent stages of a correction, which falls in line with our expectations. While we are of the view that this is just the start of the correction and that further price declines are likely to be in order, we expect the correction to remain moderate. We highlight that the shifting of mainland investor interest out of Hong Kong, if sustained, represents a salient downside risks. However, we point out that continuing supply-side woes carry upside risks to the expected correction.
Growing concerns of a hard-landing in Hong Kong's property market have started to surface. Not only have residential property transactions plummeted, but property prices have also declined 2.9% since the peak made in March earlier this year. Additionally, growing incidence of heavy discounting on new luxury projects has given the impression that property developers are looking to unload their inventory before a correction sets in. The slowdown in the sector appears to be playing out largely in line with our expectations, as we laid out in an earlier analysis on Singapore's and Hong Kong's property markets (see 'SG/HK Property: Justifiably Expensive', January 24). Below, we explain why we believe Hong Kong's property market has topped before highlighting the downside and upside risks to our expectations.
|Time For An About Turn|
|Hong Kong - Price Index (LHS) and Private Property Yields (RHS), %|
Market Topped, Correction To Remain Moderate
Aside from the price declines, transactional activity has plummeted to levels unseen in two decades, with mortgage lending falling alongside (see accompanying charts). Indeed, an average of 5,943 sales and purchase agreements were recorded in the first ten months of this year, compared to 9,627 deals recorded last year. Furthermore, according to data from the Buildings Department, approval was given for the commencement of work on 326 projects in the eight months through August, compared to more than almost 600 projects in 2012, in part reflecting the subdued state of the city's real estate market.
|Correction In Motion|
|Hong Kong - Overall Building Works (LHS) and Mortgage Lending (RHS)|
Also, the surge in property prices has not been matched by growth in household incomes, which have largely stagnated over the past few years. Indeed, real wages have only registered 2.3% growth between 2008 and 2012. Given our less-than-optimistic outlook on Hong Kong's economy in the quarters ahead, we expect income growth to remain similarly lethargic. While we believe that this is just the start of the correction, we do not envisage a substantial decline in prices and believe that the correction is likely to be between 10-15%.
|Wages Going Nowhere|
|Hong Kong - Real Wages, % chg y-o-y|
Mainland Interest Starting To Shift…
A phenomenon that is becoming of increasing concern is the gradual pullback in investor interest from the mainland. Hong Kong's property market has long been a favourite for mainland buyers given its proximity, as well as the stable economic and political environment that it offers. However, even for the cash-rich mainland buyers, Hong Kong's property valuations have reached an extreme and as a result are becoming increasingly unattractive to foreign investors. Furthermore, prospective or even existing mainland investors are likely to have been perturbed by the recent round of cooling measures, which include a 15% tax on foreigners. Indeed, mainland buyers accounted for 18% of new luxury home sales in the city in Q113, the lowest in more than four years, and in sharp contrast to the 43% registered in Q312, according to Centaline Property Agency. Given our baseline scenario for a further slowing in China's economy in the coming quarters, there remains a heightened possibility that we will continue to see Chinese buyers tighten their purse strings.
…But Supply-Side Woes Remain
Central to our call for a correction in Hong Kong's property market was the expectation of the eventual normalisation in interest rates, as well as a ramping up in housing supply in 2014 and 2015. However, as we highlighted recently (see 'Fiscal Health Rock-Solid Despite Welfare Expenditure Rise', October 3), the government appears to be on track to miss its land sales target this year, owing to hiccups in rezoning and town planning efforts.
|Housing Supply May Remain Tight|
|Hong Kong - Building Works Approvals|
Indeed, this can be evidenced by a strong pullback in approvals granted by building authorities for the commencement of construction work. As seen in the accompanying chart, the number of approvals for site formation, foundation and general building works in the first nine months of this year pale in comparison to the figures seen in previous years. This would consequently mean that the planned glut in housing supply that the government was projecting would likely be delayed and as a result could continue to keep prices elevated.