The Cooling Effects

October 18, 2010

The Chinese government had stepped up the dampening measures to curb speculations in the mainland property market just before the National Day holidays by suspending loans to buyer of third homes and extending a 30 percent down payment requirement to all first-home buyers. The People’s Bank of China has also raised successively the capital adequacy ratio of banks in an effort to reduce liquidity. The measures show that Beijing is determined to rein in the rampant property market since the first implementation in May. As Hong Kong’s economy is closely intertwined with China, the Hong Kong property market will be affected but there are diverse views of what the impacts will be.

Some people anticipate a stimulus in the Hong Kong luxury property market as they think the speculative hot money will turn to Hong Kong for opportunities, as there are much less restrictions here. This is, however, a wishful thinking.

After the 2008 global financial crisis, the Chinese government had pumped more than RMB5-trillion in its economy. Some of this stimulus money found its way into overseas markets notably the Hong Kong stock market and property market. This is the main driving force behind the speedy recoveries of both markets in Hong Kong. In fact, the luxury property market benefited the most with a 50% price hike since.

Ever since the reform of the China banking system, financing products including of course mortgage have been introduced and are becoming more popular. Today, more than 60 percent of the urban homebuyers rely on bank mortgage in their home purchases. The restriction on property lending means some of the active investors would have to liquidate their property holdings, which may include Hong Kong properties. On the other hand, mainland buyers have played a significant part in the Hong Kong luxury property market. They account for 50 percent of the buying force for properties worth between HK$50 million to HK$100 million, and a hefty 80 percent for properties valued over HK$100 million. Since many of these buyers are businesspeople to whom cash flow is essential for their businesses, an austere lending policy means they will face tight capital supply. Subsequently this will dampen the demand for high end properties.

Back in our home turf, the Chief Executive announced in his policy address weeks ago to exclude property from the Capital Investment Entrant Scheme. This will certainly deal a further blow to local property market. Although it has been spelt out that it is a temporary measure, the associated uncertainty has already stirred up the market sentiments.

These notwithstanding, we still foresee that the market will recover in the not too distant future. The chronic under supply situation in the luxury sector will not be eased any time soon, as geographical and political constraints mean that there will be no new land supply for this sector in the foreseeable future. Any new supply of luxury units will have to trickle down from redevelopments of existing old buildings, which is far from enough to quench the ever-increasing demand. It will take a major economic correction to put the heavily skewed supply-demand into balance. But history has told us that after the correction the luxury property market will resume its hike on the back of this supply-demand imbalance.

By Koh Keng-shing