Derek Ma and his family in May sold two of their eight properties in Hong Kong, doubling their money in four years. They’re struggling to sell the other six.
“We have been trying to offload more, but many sellers are now cutting prices,” said Ma, 36, whose portfolio includes units mainly in the upscale Mid-levels and Island South districts. “There’s definitely a softening in prices.”
Hong Kong home values, which surged 70 percent in the past two-and-a-half years and outperformed stocks, are set for their biggest decline since Lehman Brothers Holdings Inc. collapsed in September 2008 as land supply increases and global growth slows. Midland Holdings Ltd. and Centaline Property Agency Ltd., the Chinese city’s two biggest real estate agents, said home prices are being reduced by as much as 10 percent.
“We should see at least a 5 percent further correction in the second half if the crisis in the U.S. and Europe deepens,” said Sylvia Wong, a Hong Kong-based analyst at UOB Kay Hian Ltd. “If there’s enough panic in the market, we expect to see more price cuts.”
Hong Kong’s benchmark Hang Seng Index has dropped more than 20 percent from a November high after Standard & Poor’s downgraded the U.S.’s sovereign-debt rating for the first time Aug. 5. The Hang Seng Property Index, a measure of Hong Kong’s seven-biggest developers, is down 24 percent in the same period. The index rose 2.1 percent at the local time close of trading.
Home transactions fell to a 30-month low in July, while a land auction last week missed surveyors’ forecasts. The HK$5.5 billion ($704 million) paid by a group including Sino Land Co. and Kerry Properties Ltd. was 33 percent below the median HK$8.25 billion and was the first and only bid.
“The government land sale policy has changed,” said Andrew Lawrence, a Hong Kong-based analyst at Barclays Capital Plc who is predicting prices to fall as much as 30 percent by 2013. The result of the auction “implies a significant policy shift from maximizing tax revenue to a commitment to increasing housing supply.”
The site auctioned was the 15th put on the market by the government, which has pledged this fiscal year that began April 1 to provide more land for units to counter rising home values. It sold 17 sites the previous financial year.
Home transactions fell for a seventh straight month in July to the lowest since February 2009, according to Land Registry figures. An index tracking home prices compiled by Centaline, the city’s biggest closely held realtor, fell in June and July, the first consecutive monthly drop since December 2008.
Hong Kong property buyers expect “another leg down” for prices as transaction volumes hover near record-low levels and deposit forfeits increase for the first time this year, Samsung Securities Co. said in a report today.
“We expect it will be increasingly difficult for developers to sell properties and see further downside to developer stock prices,” Wee Liat Lee and Patrick Wong, analysts at Samsung Securities, wrote in the report. “Expectations of a top-out in property prices have increased.”
Hong Kong’s economy is sinking into a recession that is likely to last for a year, Daiwa Capital Markets economist Kevin Lai said today. Gross domestic product fell 0.5 percent in the second quarter from the previous three months, seasonally adjusted, the government said Aug. 12.
In Tai Koo Shing, the biggest middle-class housing project by unit numbers on Hong Kong Island, prices have been cut by an average 10 percent since they peaked in May, according to Ken Ng, a manager at the district branch of Midland.
“We are expecting sellers to offer further slight discounts to lure buyers” following last week’s stock market decline, said Ng, adding that deal volume in the area has dropped more than 80 percent in July compared with January.
Crash of 1997
Li Ka-shing, Hong Kong’s richest man according to Forbes Magazine, on Aug. 4 reiterated comments made in May that if buyers need to borrow too much, they shouldn’t buy properties.
Li, who controls Cheung Kong (Holdings) Ltd., the city’s second-biggest builder by value, warned property speculators and signaled his concerns that the surge in Hong Kong home prices may not be sustainable.
Hong Kong’s last major home price crash started in October 1997 and lasted six years. Prices fell almost 50 percent in one year from that month after former Chief Executive Tung Chee-hwa announced plans to add as many as 85,000 housing units in response to a doubling of real estate prices over the previous two years, and as the Asian financial crisis dampened confidence.
The decline was exacerbated as the Hong Kong dollar’s peg to the U.S. dollar meant the city’s central bank was forced to keep interest rates high to defend its currency as speculators buffeted Asian currencies during the region’s 1997-98 crisis.
The real estate market extended its decline during the bursting of the dot-com bubble, the Sept. 11 terrorist attacks in the U.S. and the 2003 Severe Acute Respiratory Syndrome epidemic.
Home prices began to recover in August 2003, fueled by record low interest rates, an influx of buyers from other parts of China and a lack of new supply.
The government, the city’s biggest owner of unoccupied land, in 2002 introduced the so-called land application system, by which land auctions are held only when a developer promises to pay a minimum price from a list of sites published annually by the government. It partially resumed regular land sale this year.
“A price correction is now becoming increasingly politically acceptable,” said Barclays’ Lawrence. “Because of the overhang experience of Tung Chee-hwa, the government had always been trying to slow the rate of price increases rather than cause a price correction. That policy is shifting.”
Tung resigned in 2005 and was replaced by Donald Tsang, who has been facing a public outcry over the past two years as efforts to stem surging house prices have had little effect.
The government in June increased down-payment requirements for some home purchases and foreign buyers, the fourth set of restrictions imposed since October 2009.
Prices rose about 140 percent from the end of 2003 to the end of 2010, according to Centaline. Average household incomes increased 20 percent in the same period, according to the city’s statistics department.
Part of that growth has been attributed to buyers from other parts of China, which Centaline estimates accounted for about a third of new luxury property purchases in Hong Kong in the first half.
In a bid to quell inflation, the People’s Bank of China raised interest rates five times and the reserve-requirement ratio 12 times since the start of 2010. Some cities have imposed property taxes and down payments have been increased.
“China periodically undergoes cooling and that is likely to have some knock-on effect on their demand in Hong Kong’s residential market,” said Simon Smith, Hong Kong-based head of Asia research at Savills Plc. “I don’t expect it to be long-lasting and I think previous growth would resume after six to eight months.”
Banks, including HSBC Holdings Plc, the city’s biggest bank by number of customers, have accelerated mortgage rate increases since March to counter tighter liquidity.
The U.S. Federal Reserve on Aug. 9 pledged to keep interest rates near zero through at least mid-2013 and signaled it’s ready to use additional tools to stimulate the economy.
“With the U.S. economy in its current condition, the good news is mortgage rates in Hong Kong won’t go too far up,” said Wong Leung-sing, an associate director of research at Centaline. “The downside is that a bad U.S. economy will also drag down sentiment everywhere and that’s something no government policy can reverse.”
Ma remains optimistic about the long-term outlook for Hong Kong prices and for now he said he is happy to hold on to his six apartments.
“From what I see, there’re already sellers who’re willing to cut prices by more than 10 percent,” said Ma. “But everyone looks at the market differently. My view is that the correction is only short-term.”