Turning Point

March 16, 2010

It is no coincidence that the Chinese and Hong Kong government are exerting more influence on their respective property markets. The Chinese government has successfully bailed China’s economy out of a short-lived recession following the global financial tsunami in 2008, thanks to the pumping of trillions of new capital into the economy since early 2009. A good portion of this new money found its way into the equity and property markets, with records of phenomenal growth results throughout 2009 across both markets. The spill-over effect is prominent in Hong Kong, as many savvy mainland investors wired funds across the border into Hong Kong’s stock and property market.

With the impetus of new investment funds and an influx of mainland visitors, Hong Kong’s stock market; luxury property market; retail and catering businesses recovered quickly while other sectors were still lingering in the doldrums. The mushrooming of China’s nouveaux riche has set the stage for a forceful rebound of Hong Kong’s luxury properties. In the last 12 months, luxury apartment prices in general have leapt 30 percent and houses recorded a price growth of 50 percent.

We can safely estimate for property sales between HK$20 million and HK$50 million, 30 percent of buyers are from the mainland. Nearly half of the properties worth over HK$50 million have been snapped up by mainland buyers, which strongly indicates the driving force for property prices are coming from across the border.

Succumbing to the local community’s call to dampen property prices and make them more affordable, Financial Secretary John Tsang introduced measures in the hopes of reigning in the escalating prices in his recent Budget Policy Speech. To quench the thirst for luxury property developments, more sizeable lands in upscale locations are included in the application list for auction; and the government will initiate public auction of six large sites without waiting for developers’ applications.

Effective April 1, residential sales over HK$20 million will be charged with a 4.25 percent stamp duty, up 0.5 percent from 3.75 percent previously. In response to the mortgage war between local banks which are offering historically low interest rates (effectively between 1 percent and 2 percent per annum), the Hong Kong Monetary Authority has set a floor mortgage interest rate at Hibor plus 0.75 percent in an attempt to take the heat out of the market. But are these measures enough to cool the market?

Certainly the cost of transactions will increase. But it’s not enough to deter buyers from entering the market, as the increased stamp duty is nominal compared to the value of the property. Supply of more land for luxury developments is moving in the right direction, but it will take years before the buildings are ready for purchase. In past decades, banks have always enjoyed superb profit margins on mortgages, which have been one of their safest sectors. So it’s expected that banks will continue to lend aggressively against property, adding fuel to the sales market. Apparently these measures alone are not enough to dampen the price hike. Nevertheless, we estimate the luxury property market will not enjoy the same buoyancy as it did last year.

China government’s new anti-speculation measures have already taken its toll on the property market in major cities. The tightening of a credit tap as announced by Premier Wen Jiabao in the National People’s Congress on 5 March 2010 will surely have a rippling effect on all sectors. We can expect an outflow of mainland hot money in the coming months, which has been largely responsible for the surge of luxury property prices in Hong Kong.

As mainland investors have become a substantial buying force in the local luxury property market, their withdrawal could take some steam out of the sales market. Moreover, there’s further uncertainty as the Hong Kong government has not had a good track record when it comes to “controlling” the market. In order to win the support of the masses, the government is likely to introduce more cooling measures, which will invariably over-shoot their goals in the end. This is because Hong Kong’s property market is very volatile; and it usually takes time for the government to formulate relevant policies. This mismatch could spell disaster for the property market.

By K.S. Koh