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Are forecasts based on fundamentals or sentiment?

(2011-07-28 20:08:22) 下一个
July 29, 2011  

Recent news reports quoted a Hong Kong developer as saying that prices in the territory’s secondary home market may continue to drop as a result of discounts offered by owners, although the price cuts are mainly in the New Territories and have not yet spread to Kowloon and Hong Kong Island.

The price falls also occur after a June 10 government announcement of a hike in downpayment for both local and foreign home buyers – the fourth set of restrictions imposed since October 2009 to curb surging home prices.

Meanwhile, in mainland China, a recent exhibition for a new property held at a cavernous hall in suburban Beijing attracted few visitors, reflecting a chill that is spreading across the real estate market.

The Chinese government’s nearly 20-month tightening campaign has resulted in growing inventories of unsold homes and higher mortgage costs.

Six of eight property analysts polled by a news agency in the past two weeks expect prices to fall during the rest of the year. Five of them expect a drop of less than 10 per cent, with only one predicting larger declines up to 20 per cent.

The other two forecast prices could actually rise further, by another 5 per cent.

However, what is undisputed is that overall demand is still strong, fuelled by massive migration from rural areas to cities, while bank deposit rates have remained relatively low. To be sure, such a chill has fallen on China’s market before but it has consistently defied earlier predictions of a crash or even a pullback.

In Singapore, new real estate numbers show private home prices posting slower pace of gains in the second quarter from the previous three months. Prices rose 2 per cent in the April-to-June quarter, down from 2.2 per cent previously. It was the seventh straight quarter of moderation.

This caused some property analysts to trim their forecasts on the number of private homes that developers will sell this year, as well as how much home prices can rise.

According to analysts, this was sparked initially by new National Development Minister Khaw Boon Wan, who made cautionary pronouncements on the property market and ramped up the launch of new public housing flats this year.

More recently, the deterioration of the external economic climate, Singapore’s lower-than-expected Q2 growth and the uncertainty for the rest of the year have taken centre stage.

You may have noticed that property market forecasts are revised as often as the change in sentiment, which leads me to ask whether some of these regular revisions are based on fundamentals or on the mood of the market. Is sentiment leading forecasts or the other way around?

Has there been a change in the fundamentals? Yes, there are threats of sovereign defaults in Europe and in the United States but the point is – the big one has not happened yet.

Of course, it is better to be cautious and postpone buying for now if you are in the market. If, for some reason, one has to sell during this period of weak sentiment, discounts will have to be given. So the falls are understandable during this period but can we read a long-term trend into it?

Do we really expect prices in Hong Kong’s secondary market or otherwise to fall in a sustained manner without prices falling first in mainland China? Across China, home prices either hover at record levels or are climbing, with declines in only a few cities.

Average new home prices rose 4.2 per cent last month from a year earlier, according to a Reuters calculation. In month-on-month terms, however, prices grew at a slower pace. In fact, one Chinese economist expects more cooling measures to come, suggesting that prices are not about to reverse direction any time soon.

In Singapore, what has changed is the sharp slowdown in economic growth as advanced estimates show. But here again, the Monetary Authority of Singapore has not seen it fit to revise its growth projections as it sees the decline due mainly to temporary shocks. I am inclined to agree with this view until I see more concrete fundamental changes.

Should the economic uncertainty blow over and should home buying return in greater numbers and should the pace of price increase grow, you can be sure that analysts will describe this as pent-up demand.

By Colin Tan – head, research and consultancy, at Chesterton Suntec International.

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