The Quandary

September 6, 2011

The land auction yesterday returned worrying results. While the two lots of land in Yuen Long and Sai Kung were sold within prior price expectations, which had been generally adjusted downward by 10 per cent just before the auction, the larger lot at Junk Bay fetched a price below all predictions. If the theory that government land auctions reveal what the developers truly think about market prospects is anything to go by, the picture is once again confirmed to be on the dark side.

But will the market head further south as manifested here? Or will it stabilise at the current level before rebounding? Let’s take a look at the factors at play, both positive and negative.

The current low interest is expected to stay for a while; at least until the world economy shows sure signs of recovery. The European debt crisis and the troubled US economy mean that western governments will not raise interest rates anytime soon. The Hong Kong interest rate is bound to follow due to the peg. Moreover, in an effort to shore up their economies, governments will have to keep or even step up capital liquidity. Low interest and excess liquidity would hike up property investment.

Inflation around the globe, especially in China and Hong Kong, would encourage people to make property investments as a hedge. History has shown that inflation coupled with low interest rates may breed a negative interest rate environment, which induces property price hikes.

The chronic shortage of supply of large and luxury properties in Hong Kong will not see any abatement in the foreseeable future, as no substantial supply is in the pipeline. This, coupled with a growing upgrading need, will certainly boost demand.

Immigrants from mainland China have in recent years become a new impetus to Hong Kong’s property market. For most well-heeled newcomers, buying a home is on the top of the agenda. This influx of wealthy mainlanders will continue to grow, as Hong Kong has always been, and will continue to be, a dream destination for many compatriots across the border.

However, in parallel with the above, there are negatives impacting the market. Hong Kong’s property prices are already beyond the reach of the majority of population, especially the luxury segment. The local population long ago demonstrated strong resistance to property prices. Going up the price ladder, the number of local buyers dwindles such that at the top rung, they are almost non-existent. Before Hong Kong can become a truly international financial and property centre, foreign buyers are not enough to underpin some of the most expensive house prices in the world.

With the global economy in trouble and no signs of recovery on the horizon, buyers will stay on the sidelines. The recent turmoil in the stock market has driven many potential buyers out of the property market, who are finding alternative havens to park their capital.

The Hong Kong government has pledged to increase the land supply over the next few years, and has already increased the pace of land sales. Although most of the supplies are not for luxury property, the psychological effect is swaying price expectations. It is expected that the government will eventually bow to pressure for the revival of the Home Ownership Scheme, which will have long-term affects on the supply and demand balance.

Since austerity measures were introduced by Beijing, excess liquidity on the mainland has been quickly mopped up. In fact, many businesses — including property developers — are feeling the pinch of a tightened credit policy. Chinese banks have been ordered to strengthen their controls on lending, and are successively required to raise the capital adequacy ratio. This has had the effect of dampening investment incentives and prompted some mainland investors to dump their Hong Kong properties to help ease cashflow in their mainland businesses.

Since the fourth quarter of last year, the Hong Kong government initiated a series of policies in an effort to dampen property demand. Of the many new measures, lowering the mortgage ceiling is one of the most powerful. The loan-to-value ratio has in less than a year been reduced from 70 per cent to 50 per cent, effectively wiping out a significant chunk of demand. The threat of further dampening measures is also keeping buyers at bay.

The combination of positive and negative forces dictates where the market is heading. Recent market activities have pointed to a bearish outcome. While we don’t think any of these factors will have significant changes in the foreseeable future, the market seems to have taken a downhill ride.

By Koh Keng-shing