A dark cloud

June 14, 2012

With the Greek debt crisis hovering over the global financial markets and Spain getting into deeper trouble, confidence in the Euro sunk to its lowest ever. Yet it’s very likely we have not seen the worst. Pessimism is the order of the day. All this has sent shock waves to other parts of the world and Asia has not been spared. What makes the picture even gloomier is the slowdown of China’s economy, which has been one of the major driving forces behind global economic growth in the last decade.

In the last few months, Beijing has been reluctant to relax its credit controls in an effort to cool down the overheated economy, particularly with regards to the property market. The squeeze on liquidity has impacted not only the property market, of course, but other segments as well, notably the manufacturing and import/export industries, on which the Chinese economy heavily relies. Capital flow has dried up, leading to the failure of many cash-strapped businesses across the country. In the last six months, the significant drop in mainland buyers for Hong Kong properties, as well as the forced sales and defaults of some property transactions by mainland investors, are manifestations of the dire financial situation across the border.

While local government officials are still threatening further restrictive measures on high property prices based on statistics that are very much lagging behind the current situation, market transactions and sentiment have already pointed in the opposite direction. Front-line property brokers can tell you right away how low sales are these days due to Euro crisis, stock market fluctuations and the uncertainties associated with the new government’s impending new policies towards the property market.

Based on his recent comments and assertions, it is fairly easy to read C.Y. Leung’s mind on Hong Kong’s housing policy. Increasing the supply is already on the table; the question is, how much? Of all the developers Landscope Christie’s International Real Estate recently contacted, none expressed optimism on the future of the market. Some are “cautiously optimistic” about the high-end market due to limited supply.

Then again, there are worries that the impact of a declining mass market will eventually spill over to the high-end market. From history we know every downturn in the property market will bring about a series of problems, including foreclosure, pressurised sales, lack of financing collateral to support businesses, and rising unemployment. A glut of unsold inventory weakens investment appetite and so the vicious cycle spirals downward. The result is an economic setback from which it will take years to recover, if external factors swing into positive.

At the time of writing, the People’s Bank of China has just announced a quarter of a per cent reduction of the benchmark interest rate, thereby indirectly confirming the dire economic situation in China. While the move may help spur investment sentiment, the real impact will take time to manifest. With regards to Hong Kong’s property market, we are of the view that it will get worse before it gets better.

By Koh Keng-shing