Photographer: Jerome Favre/Bloomberg

Hong Kong Domestic Demand for Property Seen Countering Declines in China

  • Deutsche Bank, CBRE economists among those seeing muted impact
  • Property market in Hong Kong to be helped by healthy borrowers

China’s economy is slowing and stocks are crashing. The Federal Reserve is poised to raise rates, and Hong Kong’s de-facto central bank is warning about “uncertainty” in the city’s all-important housing market, where transactions plunged last month.

So what does it all mean for real estate prices in the former British colony? The answer, according to Michael Spencer, Asian chief economist at Deutsche Bank AG: Not much.

Spencer, and property experts including CBRE Group Inc.’s Yu Kam-Hung and Knight Frank LLP’s David Ji, point to healthy borrower finances and continuing domestic demand for housing as evidence Hong Kong isn’t on the verge of repeating the six-year slump that started in 1997. Barring a major political upheaval in China, the decade-long property bull market is likely to continue, albeit at a slower pace, they say.

Loan-to-Value Ratios on New Loans at Decade Low
Loan-to-Value Ratios on New Loans at Decade Low

“People say property prices will fall because of the Fed, and that in my view is wrong,” said Spencer, who bases his conclusion on 20 years of data. “If you build a model based on real interest rates and real GDP, neither have mattered.”

Property analysts including JPMorgan Chase & Co.’s Cusson Leung and Morgan Stanley’s Praveen K. Choudhary are calling for Hong Kong property prices to plunge as much as 10 percent next year amid the prospect of higher interest rates and slowing growth in China. An anemic pace of home transactions in August -- which showed that volumes tumbled by almost a third to the lowest in 17 months -- also stoked concerns, especially in light of increasing supply of private housing, weakening retail sales and data showing that Hong Kong’s private sector economy suffered its sharpest contraction since 2009 last month.

Forfeiting Deposits

Anecdotal evidence has begun to surface that buyers are walking away from deals and forfeiting deposits, as sentiment has soured. The stock-market volatility in China and Hong Kong and the possible increase in U.S. rates means “the outlook for the property market over the coming few months is uncertain,” Hong Kong Monetary Authority Chief Executive Officer Norman Chan told reporters on Wednesday.

“The Hong Kong property market is getting very close to a turning point; housing prices have been rising for seven to eight years and the rally is coming to an end,” Jeff Yau, an analyst at DBS Vickers Hong Kong Ltd., said by phone. “However, it won’t be a freefall unless unemployment rises sharply.”

No one expects a repeat of the crash that began in October 1997 with the Asian financial crisis and bottomed as the city was gripped by the severe acute respiratory syndrome, plunging almost 70 percent in a six-year period. They have surged more than 370 percent since the 2003 trough.

Fears surrounding property prices are overblown, and it is misleading to focus on just one month of transaction data -- and a month that was marked by unprecedented stock-market volatility and a shock move by China to devalue the yuan, said CBRE’s Hung.

Volatile Market

“Hong Kong property is very volatile and I don’t think it means anything,” Hung said. “You can’t draw conclusions on one month or two or three.”

Joseph Tsang, managing director of Jones Lang Lasalle Inc., said the situation today differs from previous housing market meltdowns when borrowing costs and household debt levels were high. The ratio of new loans to property values is at the lowest in at least a decade, according to data from the HKMA, and delinquencies stand at 0.03 percent.

“In 1997 the mortgage rates were in the region of 13 percent, today we are comfortably at 2 percent,” he said. Government curbs on mortgages have also kept overall debt levels as a percentage of property value low.

Once the Federal Reserve does move on rates, the impact in Hong Kong is likely to be muted. An increase of half-a-percent in mortgage rates for someone with a 25-year loan of HK$2 million (about $258,000) would be about a HK$500 increase in monthly payments, according to Knight Frank’s Ji.

Cooling measures

“That’s the price of an evening meal,” he said. "For an ordinary family budget, the problem isn’t the mortgage payments, it’s the down payment."

Hong Kong introduced property cooling measures in February, reducing the ceiling on borrowing from 70 percent of the purchase price to 60 percent for homes valued at less than HK$7 million.

Deutsche Bank’s Spencer agrees that rising interest rates won’t matter, though prices could drift down one or two percent before resuming their climb.

If China were to experience a political crisis or a dramatic reversal of reforms, prices could fall as much as 50 percent, said Spencer.

“In this crisis scenario, it’s all about sentiment,” he said.

(A previous version of the story corrected mortgage payment estimates provided by the company.)

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