Hong Kong's Housing Market Looks Like It's Avoided a Bustby
Hang Seng Properties Index has climbed 18% from January low
Developer rallies typically foreshadow real estate prices
Hong Kong homeowners could be forgiven for fearing the worst. In a city notorious for its real estate booms and busts -- including a 70 percent tumble triggered by Asia’s financial crisis in the late 1990s -- property prices are once again sliding from all-time highs.
Yet there’s little reason to worry that the latest slump will spiral into another crash, if shares of Hong Kong’s biggest developers are anything to go by. After a 34 percent selloff from its June peak through Jan. 21, the Hang Seng Properties Index has jumped 18 percent in just two months -- outpacing the broader Hong Kong equity market by almost 7 percentage points.
The last time the property stock gauge reversed a drop of similar magnitude, in October 2011, home prices began climbing three months later. The index has been a decent leading indicator over the long term, too, foreshadowing turning points in the housing market 70 percent of the time since 1994, according to data compiled Bloomberg. While that’s not a perfect track record, it does bolster the case of optimists who say the current slide in property values is just a temporary correction, rather than a prolonged tumble.
“A price recovery in the physical market is very likely,” said Wee Liat Lee, an analyst at BNP Paribas SA in Hong Kong who predicts home prices will bottom out by year-end and resume annual gains of about 10 percent through 2019. “The reason why share prices are able to lead is because fund managers do a thorough analysis of the physical market condition and predict it will turn,” said Wee, who has a buy rating on all but one of the Hong Kong-listed developers he covers.
Analysts point to several reasons why a crash is unlikely. For one, sales volumes are starting to recover as prices drop to levels that entice buyers. After falling to the lowest level in at least 14 years in mid-February, secondary transactions in major housing estates rebounded five-fold to a nine-month high in the week ended March 13, according to Midland Realty.
The market is thawing as fears over an exodus from Hong Kong assets fade. The city’s dollar has rebounded from the weak end of its trading range against the U.S. currency, reaching the strongest level in two months on Monday, while interbank borrowing costs have tumbled from five-year highs as investors scale back bets on higher U.S. interest rates and an economic hard landing in China.
Hong Kong could reconsider some of its property curbs if prices fall too far, said Cusson Leung, the head of Hong Kong research, conglomerates and property at JPMorgan Chase & Co. Over the past six years, authorities have increased the minimum down payment requirement on mortgages, lifted taxes on non-resident homebuyers and introduced a special stamp duty for purchasers who flip properties within 36 months.
Leung, who sees home prices dropping another 10 percent in 2016 to levels that would make government easing more likely, has overweight ratings on developers including Cheung Kong Property Holdings Ltd. and New World Development Co.
Cheung Kong Property, which gets about 84 percent of its revenue from the residential market, and New World, which relies on the residential segment for 46 percent of sales, have both jumped more than 20 percent since the Hang Seng Properties gauge started rallying in January. The index has recorded 23 swings of at least 30 percent since Bloomberg started compiling the data in 1994.
Of course, the stock market does sometimes diverge from the physical property market, and Hong Kong faces multiple headwinds -- including shrinking retail sales, declining port cargoes and waning interest from Chinese tourists -- that could translate into lower demand for real estate over the long term.
There’s also the problem of affordability. Hong Kong was ranked as the most expensive housing market among 87 major metropolitan areas as of the third quarter of 2015, according to an annual survey compiled by Demographia, after home values surged more than 360 percent from a 2003 nadir through mid-September. The government will continue to increase housing supply and curb demand from speculators, Hong Kong Chief Executive Leung Chun-ying said on Tuesday.
“We’ve been reducing our exposure to Hong Kong property," said Charlie Awdry, a London-based portfolio manager at Henderson Global Investors Ltd., which oversees more than $131 billion. “If you look at the longer-term trend of where the industry fundamentals are going, they tell you that physical property prices are heading down in Hong Kong and there is a lot of supply coming."
The latest home-price data show continued downward pressure. Centaline Property Agency’s index of secondary-market values sank 2.15 percent in the week ended March 13, the biggest drop since 2008, to extend its decline since mid-September to 13 percent.
Still, that hasn’t stopped shares of real estate companies from rallying. The Hang Seng Properties gauge climbed to the highest level in more than three months on Thursday, and closed on Tuesday within 2 percentage points of a bull market.
Hong Kong’s property stocks have more than priced in the potential for lower home values, according to Sandy Mehta, the chief executive officer of Value Investment Principals Ltd., a Hong Kong-based advisory firm. The Hang Seng property gauge’s price-to-book ratio fell to 0.58 in January, the lowest level since 1998, and was trading at 0.69 on Tuesday, according to data compiled by Bloomberg.
“Discounts to current marked-to-market land and asset values are high, even if one assumes prices may decline,” said Mehta, whose stock picks include New World. “There is a lot of value for investors who have a one to two year time horizon.”