Hong Kong Property Slump Worries Investorsby
Deutsche Bank's Spencer says developers missed chance to sell
Low home sales are latest evidence prices may fall further
In a city that saw demand propel property prices to a record last year, the estimate that transactions reached a 25 year-low in Hong Kong shows how quickly sentiment has turned.
Home prices have slumped almost 10 percent since September and monthly sales in January fell to the lowest since at least 1991, according to Centaline Property Agency Ltd. Amid a spike in flexible mortgage rates this month and anemic demand for new developments, the low transactions volume for January is the latest evidence that prices have further to fall.
"The danger is that when sentiment turns negative, it’s very hard to turn things around," Michael Spencer, Deutsche Bank AG’s Hong Kong-based Asian chief economist, said in a telephone interview. "Developers realize they missed the best opportunity to sell."
Hong Kong’s property market has been showing signs of weakening amid a rising supply of homes, higher short-term interest rates and slowing growth in China. Developers have been slow to make outright price cuts to move real estate while would-be buyers are delaying purchases in anticipation of further price declines, creating a standoff that could put more pressure on prices and drag down the city’s economy.
Falling property prices may create a negative wealth effect on consumption by prompting buyers to cut back on their purchases, Deutsche Bank’s Spencer said. That could deal a huge blow to an already vulnerable economy where half the population owns homes and consumption accounts for nearly two-thirds of gross domestic product.
Based on housing and economic growth data going back to 2000, Spencer said that consumption growth declined on average by one percentage point for every 10 percent decline in housing prices. That suggests economic growth in Hong Kong could be halved to 1.1 percent this year assuming a 20 percent drop this year, he said.
Developers are showing caution too, which could further weaken the outlook for the property market. According to Bloomberg Intelligence, two out of three government attempts to sell residential land sites through tenders since November failed after bids failed to match the minimum price.
Housing prices are down 9.5 percent since their September peak, according to the Centaline Property Centa-City Leading Index and may fall another 20 percent in 2016, according to some estimates. Centaline estimates that transactions reached 3,000 units last month. The previous low was 3,786 units in November 2008, according to a Jan. 31 release.
The tepid demand was pronounced in January as buyers traditionally delay making purchases in the lead-up to the Chinese Lunar New Year holiday which begins on Feb. 8. In turn, many developers have delayed the launch of new projects until then. Sales in December were 5,294 units. The drop was particularly sharp in the primary market, with an estimated 420 new units sold last month, down 80 percent from December’s 2,127 units, Centaline said.
In order to encourage buyers, developers have been offering discounts and stamp duty rebates as well as second mortgages allowing borrowers to finance up to 90 percent of a home’s value. Still, they’ve resisted slashing prices.
Henderson Land Development Co.’s Harbour Park mass-market development in the Sham Shui Po district of Kowloon sold 15 units during January with discounts and rebates of up to 11 percent, out of a 60 units released so far, according to the company website. Prices before discounts ranged from HK$3.47 million (about $446,000) for a 202 square-foot flat to HK$4.86 million for 276 square feet.
"If developers want to sell, especially for projects in the New Territories, they have to provide incentives to potential buyers," said Thomas Lam, senior director of valuation and consultancy at Knight Frank LLP. "If they want to launch a new project they will have to offer more incentives than 12 months ago."
Rather than try to entice buyers, Hang Lung Properties Ltd. Chairman Ronnie Chan said in an interview last week that there’s a possibility the developer won’t release any properties for sale in Hong Kong this year as prices continue to drop. He said the builder, which has an inventory of 694 residential units it has not released onto the market, is under “no pressure” to sell.