The US Federal Reserve expects to keep interest rates near historic lows until late 2014. With the currency peg, Hong Kong’s low interest rates will likely persist into 2014 or even beyond.
“Although the Hong Kong Monetary Authority (HKMA) asked mortgage lenders to tighten lending to foreign buyers and multi-property owners, banks are under pressure to loosen up credit,” says Sharmaine Lau, chief economist at mortgage brokers mReferral Mortgage. “Some banks might lower the downpayment requirement to 10 per cent of the property value and they might offer a rate discount of five basis points to borrowers with a good credit standing,” says Lau, citing HKMA mortgage statistics.
Home loans drawn down in December 2011 fell to HK$8.9 billion, but mortgage repayments in the same month amounted to HK$10.1 billion, the highest repayment ratio since March 2009. Lau believes banks are softening the lending criteria on new mortgage approvals in an attempt to achieve the HK$10 billion monthly balance.
“Banks are facing a dilemma themselves,” Lau says. “They’re facing a steep rise in funding costs and so mortgage rates tend to rise over a longer time span. But, some loosening is also needed after a sharp decline in mortgage business. This will lend some support to demand and prices in the near term.”
The government forecasts inflation this year will be 3.5 per cent, while Lau expects mortgage rates to range between 2.3 per cent and 3 per cent per annum for the rest of the year. Hong Kong dollar deposit rates are almost zero.
Home sellers unwilling to sell their properties at lower prices should find holding on to their properties and turning to the rental market a viable option.
According to a Colliers research report, Hong Kong’s luxury residential yields ran at slightly lower than an average of 3 per cent per annum from the second quarter of 2009 until the final quarter of 2011.
Compared with the volatile stock market last year, real estate assets, especially prime residential property, remain a relatively safe haven for longerterm investors.
Clara Chu, head of residential leasing at Colliers, says prime residential rents have not fallen sharply as some had feared. “The latest layoffs in the banking sector did have some impact on tenant demand,” she says. “Demand from senior bankers with rental budgets in excess of HK$200,000, has plummeted. But the mid- to upper-range, where monthly rents fall in the HK$120,000-HK$200,000 range, did not shrink.”
She adds that the stronger rental housing demand from global retailers, which are a direct beneficiary of a robust retail sales market, makes up for the weakness in demand from bankers. Though prices remain close to the 1997 peak levels after a recent correction, the cost of ownership is about 40 per cent that for 1997, according to Centaline Property Agency’s housing affordability index.
The Centa-City Leading Index, compiled by Centaline, indicates that average home prices across the board as at mid-February were only 5.3 per cent below the last peak registered in July 2011.
Wong Leung-sing, an associate research director at Centaline, attributes the resilience to the distortion caused by the special stamp duty (SSD), which taxes short-term selling heavily.
“The market is being heavily distorted by the SSD,” he says. “A sustainable market should be made up of the right mix of owner-occupiers, longterm
investors and a small proportion of speculators. But apparently speculators have been evicted.”
During the global financial crisis in 2008, the immediate price correction was triggered by an exodus of speculators who were in a rush to lighten their portfolios, which explains why prices fell 20-30 per cent in a few months, according to Wong.
Despite the rebound in February sales resulting from the pent-up demand during the Lunar New Year hiatus, Wong expects home sales volumes to hover at low levels on a year-on-year basis until after Easter, when dust settles over the appointment of the city’s new chief executive, while waiting to see how the euro zone debt crisis plays out. He believes a price slump by then is unlikely.
However, Thomas Lam, head of Greater China research at Knight Frank, forecasts that luxury property prices will fall 10 per cent this year,
supported by supply constraints in prime locations. He believes prices in the mass market will fall 10-15 per cent because of an expected rise in supply of small- and medium-sized units.
Fine Tuning
Secretary for development Carrie Lam Cheng Yuet-ngor said this month that the government was planning to sell 47 sites in the 2012/13 financial year, starting in April, which will produce 13,500 flats.
“The availability of this large number of new residential sites for sale demonstrates well the government’s firm commitment to increase housing land supply,” Lam said. She added that if the sites were not sold, the government would transfer them to the Housing Authority for public or subsidised housing, rather than sell them on the cheap.
“We will continue to adopt a multipronged approach to expand land resources, and this work will not be affected by economic cycles or fluctuations of the property market,” Lam said.
Real estate experts feel the government may have adjusted its policy towards the property market.
“While the government has put forward 47 sites for sale this year, very few are in the luxury bracket, while the vast majority are for the mass market in the New Territories,” says Charles Chan, managing director for Savills Valuation.
“The new government supply suggests the shortage in supply of luxury properties will remain, though there will be more supply of housing for the mass market. This suggests a further polarisation of the high-end and the mass market in terms of prices.
“I think the adjusted policy is to focus on people’s livelihood. The objective is now to cool down prices for the mass housing market, so housing won’t become too expensive for most people. The focus is to solve a livelihood problem.
“The lack of new supply of luxury property is a ‘good signal’ for the market. For the luxury market, the government seems to be interfering less. For the housing needs of the wealthy, the government is leaving it to the market,” Chan says.
Five of the government sites for sale will be on Hong Kong Island, five will be in Kowloon, with 37 in the New Territories.
From April to June, the government will put on sale by tender four residential sites in Tseung Kwan O (two), Sha Tin and North Point, which could provide a total of about 1,400 flats. Minimum flat number requirements will be imposed on the Tseung Kwan O and North Point sites. Later in the financial year, two sites in the Kai Tak development at the old airport have become available for the first time, which could produce 1,000 units.
In addition to the government sites, other new supplies include property projects by the MTR, redevelopment projects by the Urban Renewal Authority and projects subject to lease modification or land exchange. The government says the total housing supply in the coming financial year will produce 30,000 units.
That figure may not be achieved, however, because it is unlikely all of the government sites will be sold, and some may not even be ready, argues Lau Chun-kong, international director and head of valuations at Jones Lang LaSalle.
“The effective supply is likely to be just over 20,000 units. The market should have no problem absorbing that figure,” Lau says.
The 47 sites available this year is less than the 52 last year, which could be built into 16,000 units. Experts believe only about half were sold.
Lau believes the new flats are only adequate to meet the needs of the
increase in population, and they only make up a small percentage of the
total
housing market in Hong Kong. “There are about 1.2 to 1.3 million units
in Hong Kong, so the new supply only makes up about 2 per cent.”
Lau points out that in the rush to complete a larger number of flats, the government is limiting the size of units in some sites, so that more units can be built in the same area. The result is a further shortage of large units for the luxury market.
He forecasts the shortage in luxury housing will continue in the coming few years.
“Based on the Rating and Valuation Department’s class E classification of large luxury properties, there will only be 520 luxury flats completed in 2012, with the number falling to 210 in 2013, and less than 200 in 2014.”
But he expects prices will be under pressure this year, because of the challenging global economic outlook, and lay-offs in the banking sector.
