Hong Kong's property market seen defying dire predictions

[HONG KONG] 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.

Mr 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.

"People say property prices will fall because of the Fed, and that in my view is wrong," said Mr 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 per cent 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.

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 US 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 per cent in a six-year period. They have surged more than 370 per cent 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.

"Hong Kong property is very volatile and I don't think it means anything," Mr 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 per cent.

"In 1997 the mortgage rates were in the region of 13 per cent, today we are comfortably at 2 per cent," 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 S$363,760) would be a HK$200 to HK$300 dollar increase in monthly payments, according to Knight Frank's Ji.

"That's the price of an evening meal," he said.

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 per cent, said Mr Spencer.

"In this crisis scenario, it's all about sentiment," he said.

BLOOMBERG