Marked Contrasts

April 15, 2010

Despite the government’s dampening measures over the overheated property market in the Mainland, prices have continued to surge. Record high land prices and house prices have emerged in major cities, fuelled by an even greater demand. This, and the chronic discontent with the stratospheric prices, has prompted the State Council to take stricter steps to cool down the rampant market, elevating mortgage rates and down-payment requirements to dampen demand. On the supply side, The Ministry of Land and Resources of China has announced that it will increase land supply by 135 percent to 180,000 hectares this year.

We are certain that the surging prices will eventually be reined in because the Chinese government is determined to cool down the market and will take more measures if the prevailing policies are insufficient. But will this affect Hong Kong? If yes, then how?

As the Mainland and Hong Kong’s economy are tightly intertwined, there are bound to be repercussions in Hong Kong when any substantial policy changes are made on the Mainland. When China’s property market loses its steam, the impact will be felt across other economic sectors such as domestic consumption, construction and local governments’ tax revenue. Coupled with a tightened credit cap, hot money, which has been accountable for the rampant price surge on both sides of the border, will dry up. This will effectively take the heat out of Hong Kong’s luxury property market, the staggering price growth of which has been largely attributable to capital flow from the Mainland.

The substantial participation of Mainland capital in the local market has pushed luxury property prices to a historical level. Similarly, the withdrawal of this capital will spell a chilly period for the luxury sales market. There may be other factors at work, but we have already seen a slowdown in sales activities in recent weeks.

In the rental market, the picture is taking a different turn. Multinationals especially the financial companies are beefing up their Asian operations. Hong Kong as a major financial hub has witnessed an increased influx of expatriates who have pushed luxury rentals higher in the last few months.

It is not uncommon these days that signed rentals are higher than the original asking price for high-end properties due to keen competition. With Western economies still in the doldrums, Asia is set to benefit thanks to the robust economy in China. Hong Kong, being at the centre of it all, will undoubtedly have its rental market start booming again.

By K.S. Koh