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Hong Kong Home Prices May Fall as Much as 45%, Barclays Says

Hong Kong Home Prices May Fall as Much as 45%, Barclays Says
Home transactions fell for a ninth straight month in September, while prices declined 3 percent from June to August, government statistics show. Photographer: Jerome Favre/Bloomberg

Hong Kong’s residential property prices would drop by 35 percent to 45 percent over the next two years in the “hard landing” scenario of a deflationary economic environment, Barclays Capital Research said.

In a “soft landing,” continued mortgage rate increases and a slowing economy would drive prices 25 percent to 30 percent lower over 2012 and 2013, Andrew Lawrence and Vivien Chan, analysts at Barclays, wrote in a report dated today.

“Given the economic outlook, it is difficult to see property prices and transaction volumes reverting to their long-term relationship without a price correction,” the analysts wrote. “The depth of that correction depends upon the external economic environment.”

The threat of a global economic slowdown is intensifying risks in Hong Kong’s home market and the government will monitor housing policies designed to curb prices, Financial Secretary John Tsang said Oct. 27. Home transactions fell for a ninth straight month in September, while prices declined 3 percent from June to August, government statistics show.

Barclays’ soft-landing outlook is based on a continued Hong Kong dollar liquidity “squeeze” in the banking system that boosts mortgage rates for new borrowers, according to the note. In this scenario, higher borrowing costs would price first-time buyers out of the market and discourage existing home owners from trading up, causing a 15 percent to 20 percent decline next year and a 10 percent slump in 2013, as investors sell into “weak demand,” they wrote.

Stronger Dollar

The Hang Seng Property Index, which tracks the performance of the seven-biggest developers in the city, fell 1.7 percent today, the largest drop among the four industry groups in the benchmark Hang Seng Index and the most in almost two weeks. The property gauge is down 17 percent this year, compared to a 15 percent drop in the benchmark.

Under a hard landing, falling household incomes and homebuyer confidence would drive declines in residential property prices, along with a wider relaxation of mainland credit and a U.S. dollar rally, according to Barclays. A stronger dollar has historically been negative for Hong Kong property and stock prices, the analysts wrote.

“Weaker demand and increasing secondary supply coming back to the market would cause property prices to over-shoot their long-term fundamental support levels,” the analysts said. “This would suggest that residential property prices would fall 35-45 percent over 2012 and 2013, which implies a relatively optimistic two to two-and-a half year correction period before prices were to bottom.”

Mortgage Rates

Barclays has been bearish on Hong Kong’s real estate market since at least April 1, when the firm issued a report predicting a 30 percent drop in the city’s property prices from 2012 to 2013, and an increase in mortgage rates. Banks will quadruple mortgage rates for new borrowers to more than 4 percent by the end of 2012 from as little as 1 percent to boost lending margins, they wrote in April. Rates for new borrowers have gained 200 basis points in six months, Barclays said in today’s note.

The city’s home prices climbed more than 70 percent since early 2009 on record-low mortgage rates and an influx of buyers from other parts of China. Hong Kong’s peg to the U.S. dollar means the city follows interest rates set by the Federal Reserve, which has held its benchmark rate at a range of zero to 0.25 percent since December 2008.

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