Property: Scope For Upside, But Corrective Pressures Mount
BMI View: While the recent leg up in prices runs against our call for a correction in the real estate market, we are not abandoning our bearish take on the market. Indeed, prices have become even more overstretched. We are not discounting a further marginal near-term upside in prices, as investors ride on bullish sentiment from the equity markets, as well as QE3. That said, we believe that receding demand, stemming from further economic deterioration and the government's tightening measures, coupled with the anticipation of a meaningful increase in the housing supply in the coming years, will combine to enforce a correction in property prices in 2013.
Since the trough it hit in 2008, Hong Kong's property prices have surged more than 95%. The rapid rise in prices has been the subject of much popular discontent and the topic of housing affordability has increasingly become a social and political issue. A 4.5% fall in private property prices in the latter half of 2011 proved to be transitory as prices have now increased almost 14% since the start of this year. While the surge in prices has been contrary to our call for a correction, property prices are even more overvalued and due a correction. While we see scope for a marginal rise in prices, this trend is likely to be unsustainable and we maintain our view of a correction within the real estate market over the coming quarters.
|Hong Kong - Property Price Index By Region|
Marginal near-term upside: A considerable portion of the surge in property prices has been underpinned by foreign investors and wealthy locals, particularly investors from mainland China. Indeed, this group of investors has been participating heavily in the luxury and higher-end homes, which, have in turn been driving up broader market prices. To be sure, Chinese buyers were estimated to account for an estimated 51% of home transactions in Q311 and have reportedly commanded more than a 30% share of property transactions in recent months. The optimism in the housing market has also been reflected in the equity markets, with the Hang Seng Property Index having soared more than 50% since the bottom it hit in 2011. In our view, the third round of quantitative easing could possibly drive more bullish sentiment, as investors harbour expectations of a sustained period of abundance in liquidity and a low interest rate environment.
|Fuelling Bullish Sentiment|
|Hong Kong - Hang Seng Property Index|
But corrective pressures to win-out eventually: Looking ahead, against a backdrop of extreme valuations, the city's property market continues to face considerable corrective pressures, with the most crucial being that of further economic deterioration. With Hong Kong's entrepot economy closely tied to a weakening global, and more crucially Chinese economy, we do not envision an improvement in Hong Kong's growth prospects. Local homebuyers are consequently likely to maintain a level of cautiousness. The global economic slide is also expected to stem, to a certain extent, interest from Chinese buyers. The new government administration also appears to be making meaningful efforts to curb the rise in property prices. The most recent set of measures saw the government tightening mortgage lending, as well as attempting to limit the influx of foreign buyers. Loan tenors across the board were reduced to a maximum of 30 years from 40 years previously. Homebuyers taking a second mortgage onwards will face a higher down payment requirement, while buyers with incomes that originate from outside Hong Kong will be subjected to the applicable down payment requirements, plus an additional ten percentage points.
|Set For A Reversal|
|Hong Kong - Midland Realty Inventory Level|
Alongside the downside pressure on demand, supply-side issues support our contention for a property correction. The most recent policy measures saw the government announcing plans to rezone 36 sites meant for public use into use for residential purposes, as well as expediting the approval of permits for private home sales. This comes on the back of a pledge by the Chief Executive to speed up home sales and the supply of land. The scaling back in demand owing to economic deterioration, supplemented by an increase in housing supply, would combine to lead prices lower. Additionally, we remain unconvinced by the false sense of comfort investors may find in the abundance in liquidity as we cannot discount a tightening in bank lending when the downturn starts to kick in.
Upside Risk Stemming From Prioritising Local Buyers: Under the "Hong Kong Land For Hong Kong People" policy, sales of certain properties will be restricted to only Hong Kong citizens. While this measure may help curb social discontent and improve home ownership, we highlight that such a policy, if mismanaged, may have the unintended consequences of pushing property prices even higher. If the government fails to increase supply adequately to the broader range of investors, and places too much focus on local buyers, the pool of investable property available to all investors would be constricted, potentially leading prices higher.