Are skyrocketing property prices in Hong Kong set to fall any time soon?

Are skyrocketing property prices in Hong Kong set to fall any time soon?

Bloomberg News Online reported on October 28, 2013 that Hong Kong’s property prices might have reached its peak, and could fall by a significant percentage to approximately 30.0 percent by 2015. Bloomberg News cited research reports released by Barclays Inc., together with UBS AG and Bank of America Corp, indicating the dramatic moves in the Chinese territory’s property market, as housing supply increased, and household income levels across the board are generally moving downwards, thus crimping the affordability and demand for homes. In addition, analysts from Barclays have assigned a ‘negative’ rating on the Chinese territory’s property sector, and they are forecasting that office prices will fall by as much as 20.0 percent, which is quite significant given the huge run ups many investors have seen for the past few years.

With all this talk about the property bubble brewing, and is now in a price correction phase in Hong Kong, one of the questions that investors and potential property buyers might ask is whether the legislative council, together with Chief Executive Leung Chun Ying (CY Leung) is doing something to tackle the various social issues, including the growing influx of Mainland Chinese into the territory, shortage of public housing, household poverty levels, and among many other issues. The household poverty levels have been one of the main government issues that political analysts have cited as critical and needs to be addressed immediately. According to a November 06, 2012 Thomson Reuters news report, it cited statistics obtained from the territory’s Council of Social Services showing that more than 1.1 million people, or approximately 17.0 percent of the population lived below the poverty line in 2011, earning less than Hong Kong (HK) Dollars 3,500.00 per month. The Hong Kong government define poverty as someone earning less than half of the average monthly income. With such low household income levels, coupled with tight land constraints in the territory, it is no wonder that many Hong Kong households are forced to live in cramp residential apartments, and sometimes living in cage-like cubicles carved out from a single room.

With the expected declines in property prices across the board, residential, office, and industrial, one might think that household income levels will soon keep pace with prices and affordability, but in reality, household wages continue to remain stagnant, and on any given day, if one were to walk along the streets in Hong Kong, you might find many ordinary Hong Kong people, especially the elderly folks are using pushcarts, with several folded up carton boxes stacked on top, and as well as beggars stationed near the ferry terminal seeking for a dime or two in order to get by. Such scenes are quite heartbreak, but in the fast paced environment such as Hong Kong, it is inevitable that some of the residents have been left behind. It is a serious social issue that the Hong Kong government will have their plates full as it tries to narrow the widening income gap.

Several prominent public-listed real estate corporations in Hong Kong have also had their stock ratings revised downwards due to the expected property price declines. Analysts from Barclays were advising clients to reduce their portfolio holdings in eight of the fourteen names covered, including Sun Hung Kai Properties Ltd., the territory’s second-largest builder by market capitalisation, Swire Properties Ltd., New World Development Ltd., and Wharf Holdings Ltd. Their ‘buy’ calls include only two stocks, namely Cheung Kong Holdings Ltd, controlled by Asia’s richest tycoon, Li Ka-Shing, and Hang Lung Properties Ltd., which has more than 50.0 percent of its revenue generated outside Hong Kong during the first-half of 2013. As of October 28, 2013, the Hang Seng Property Index, which tracks nine of the biggest developers listed in the territory, including Sun Hung Kai and Cheung Kong, has declined by as much as 13.0 percent since peaking in January.

With all the stock downgrades, and the overall gloom among many property investors in Hong Kong, there are questions as to when is the next property boom cycle going to happen. Is the housing downturn going to dampen the overall investor sentiments in Hong Kong? How should investors position their investment portfolios to either increase their investment exposure or to reduce? These are perfectly valid questions that any ordinary investor will ask, but I believe that the Hong Kong property market is now at its price correction mode, and reversion to the mean prices is currently underway, given the tremendous run-up of property prices seen in the past five to ten years. It could also bring about some easing concerns among legislators on implementing additional property curbs, as past measures have not brought about much success in bringing down the astronomical price levels seen in the past. I believe that the most critical issue that the Hong Kong government shall turn to is to look into ways as to how to alleviate the high poverty levels; improvements to the employment conditions for the Hong Kong people; increase public housing supply in order to ensure that Hong Kong people can obtain affordable and decent living conditions; reducing the wait time needed to apply for public flats; keeping in check on the distribution of welfare subsidies, while maintaining a high quality of government services available to the territory’s residents. These are some of the measures which the Hong Kong government will have to look into as the property market in the territory goes through a transition period, which will see housing prices normalise.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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