Bloomberg News Online reported on January 03, 2014 that home prices in the Chinese territory of Hong Kong are expected to face double digit declines in 2014 to 2015. This is according to research reports published by various sell-side firms, including Barclays Plc., UBS, and Jefferies Group which collectively forecasted that home prices are expected to decline by an average of between 20.0 percent in 2014 to as much as 30.0 percent in 2015 due to demographic shifts, the existing anti-speculation cooling measures implemented by the Hong Kong government, expected household income declines, and potential supply injections.
According to the Bloomberg News article, it reported that several real estate agents marketing Hong Kong dwellings ranging from one-bedroom apartments to 5,000 square-foot (465 square-metre) houses have reportedly offered discounts of as much as 20.0 percent as a result of an oversupply situation, plunging home prices, and the need to clear land inventory on their books before additional anti-speculation measures are being introduced. There is also a need by real estate corporations to avoid taking huge impairment costs associated with owning depreciating real estate assets. In addition, many Hong Kong-based developers have took on massive financial leverage during the real estate bubble following the global monetary stimulus which resulted in an unprecedented shift towards owning hard assets such as properties due to the low interest rate environment, and potential inflation woes. Given that the US Federal Reserve (US Fed) has begun its monetary stimulus withdrawal measures starting in January 2014 to the tune of USD 10.0 billion a month, the impact of yield spreads between the two and the 10-year Treasuries have increased to as much as 210.0 to 250.0 basis points (bps). Hong Kong, where its monetary system is tied closely with the US Fed has begun to feel the impact of the spreads widening. A chart illustrating the extent of the spreads between the 2 and 10-year Hong Kong treasury yields is as follows:
Source: Thomson Reuters Metastock.com (Please click on the image to obtain a better view)
The yellow line on the bottom of the chart indicates the daily yield movements over the course of three months starting from October 2013, and has been held steadily at approximately 38.2 basis points (bps), while the top purple line denotes the daily yield movements over the same period which have increased from 209.7 bps during the month of October 2013 to the current 240.6 bps as of January 03, 2014.
Given the backdrop of an increasing interest rate environment and combining with the relative strength of the Chinese Yuan against the US Dollar for the past five years or so since the beginning of the last recession in 2008-2009, most the previous price increases were originated from Mainland Chinese investors who have been propping up the transaction size of the real estate market in Hong Kong to astronomical levels. The Hong Kong government reacted by imposing some of its toughest property cooling measures which took place in February 2013. The current regulations include the doubling of stamp duties to as much as 8.5 percent for all private property transactions involving values that are north of HKD 2.0 million (USD 258,000). Before the February 2013 new ruling on property transactions that were put in place in Hong Kong, there was also an imposition of a 15.0 percent tax on home purchases by all non-Hong Kong residents during the previous year in October 2012. The 15.0 percent tax is specifically aimed at private property purchases originated from Mainland Chinese investors, who form the bulk of the overall private property transactions took place during both years (2012 and 2013). Admittedly, there are other foreign investors including multinational corporations purchasing private properties in order to house their expatriate employees, however they were not being singled as the so-called ‘real culprits’ behind the continuous housing price increases seen in the past before these property cooling measures were being introduced, instead it was the Mainland Chinese which came in droves due to the appreciating Chinese Yuan currency against the greenback.
Since the property price cooling measures were being implemented over the course of the past year beginning in October 2012, there has been a marked drop in property transactions. According to data obtained from the Land Registry in Hong Kong, Bloomberg news reported that approximately 46,000 homes changed hands in the city during the first 11 months of 2013, which is down from the 78,000 deals completed during the same period a year earlier. Several property developers have come out offering huge discounts in a bid to reduce its land inventory holding costs, but at an expense of declining real estate values, which could hurt their bottom-line when earnings season in Hong Kong is scheduled to kick-start from mid-January 2014.
As 2014 is just getting started, there are questions that might be on investors’ minds regarding the direction of the real estate market going forward which at this point seemed to be pointing towards a downtrend mode, especially given those recent downbeat forecasts made by the sell-side brokerages on the state of the real estate market in Hong Kong. The Hong Kong government has also vowed not to withdraw its property cooling measures until there are signs of a steady supply of new housing. The Hong Kong property market has avoided an asset bubble forming dangerously high. As the new measures have been put in place since late 2012, there have been questions that remained uncertain including the duration of the price drops, and will the latest measures be significant enough to ensure that there is stability in the real estate market in Hong Kong going forward, or do the Hong Kong people have to be prepared to face another round of housing shortages, and affordability issues when the existing property cooling measures are eventually removed.