Hong Kong housing bubble! Mainland buyers blamed

November 06, 2009

Residential property prices in Hong Kong are bubbling up again, following substantial falls in the second half of 2008.  Hong Kong is riding another euphoric wave of property purchases. 

Hong Kong’s housing market was seriously affected by the global financial crisis, but after falling 17% (18% in real terms) from June to December 2008, Hong Kong’s residential price index rebounded and rose by 20% (21% in real terms) from last year’s bottom to August 2009, according to the Ratings and Valuation Department (RVD)

A massive influx of buyers from mainland China has been a partial cause. The Chinese stimulus package of November 2008 boosted liquidity, and cash-rich Chinese, facing restrictions on bringing out capital from China, bought properties in Hong Kong.

Hong Kong Island, Kowloon and the New Territories all saw strong price increases in the first two quarters of 2009. The overall residential price index in Hong Kong rose 8.3% (8.4% in real terms) in Q2 2009.


PRIVATE DOMESTIC PRICES (Q2 2009)

PROPERTY CLASS
LOCATION
USD PER SQ. M
Q-O-Q Nominal
Q-O-Q real
A

(Less than 40 sq. m.)
Hong Kong

Kowloon

New Territories
7,566

5,434

4,853
13.6%

12.5%

7.6%
13.9%

12.8%

7.9%
B

(40 to 69.9 sq. m.)
Hong Kong

Kowloon

New Territories
8,890

6,997

4,923
12.2%

16.8%

7.7%
12.5%

17.2%

8.0%
C

(70 to 99.9 sq. m.)
Hong Kong

Kowloon

New Territories
11,717

10,731

6,155
13.6%

14.1%

6.9%
13.9%

14.4%

7.2%
D

(100 to 159.9 sq. m.)
Hong Kong

Kowloon

New Territories
14,651

12,395

7,530
7.0%

8.2%

17.4%
7.3%

8.5%

17.7%
E

(more than 160 sq. m.)
Hong Kong

Kowloon

New Territories
20,764

17,522

8,869
15.0%

6.1%

13.4%
15.4%

6.4%

13.7%

Heavy intervention by the HK government helped. There were two stimulus packages, in October 2008, and May 2009, which maintained buyer confidence and encouraged continued spending. The government likewise implemented measures to strengthen the financial sector and ensure liquidity.

Record-low completions in house construction by private firms in 2008 arguably also contributed to the rise of house prices.

Why Hong Kong’s house prices are hard to predict

Analysis of Hong Kong’s residential property market is difficult due to four interlinked features:


  • Hong Kong’s house prices are among the most volatile in the world.
  • With a land area of 1,104 sq. km., land supply in Hong Kong is extremely limited and can be released by the government at will.
  • The market is dominated by few major real estate developers.
  • The public housing sector is one of the biggest in the world.

The property bubble prior to the Asian crisis saw residential property prices rise 71.5% (54% in real terms) from October 1995 to October 1997. After the Asian financial crisis house prices plummeted by 44% (46.1% in real terms) within a year (October 1997 to October 1998).

Then chief executive Tung Chee-hwa pledged in 1997 to construct 250,000 units of residential properties in the next ten years, despite the housing slump. This contributed to a further drop in house prices. From its peak in 1997, residential property prices fell by 66.1% (61.8% in real terms) in Mid-2003.

In July 2003, house prices began to pick up again. Residential property prices rose until May 2005, rising 63% (62% in real terms). The housing market then stalled in the first half of 2006, before increasing 32.4% (23.5% in real terms) from August 2006 to August 2008.

It is difficult to predict future house price changes. Nonetheless, according to property consultants Colliers International, Hong Kong house prices are expected to rise another 5-10% in the short term.

Influx of Chinese buyers

The Chinese government implemented a stimulus package amounting to CNY4 trillion (USD585 billion) in November 2008, reviving the Chinese housing market, and prompting a surge of mainland buying in Hong Kong. As much as 40% of new-home sales buyers now come from mainland China, according to the Wall Street Journal. Newspaper reports of luxury properties sold to mainland Chinese at staggering prices are now commonplace.

Although there are no signs of the mainland monetary tightening yet, demand for Hong Kong properties would surely drop, if the mainland suddenly reversed its loose policies.

The stimulus package helped

In December 2008 the Hong Kong government announced a stimulus package focused on providing loan guarantees and additional employment.


  • The government would provide up to HKD100 billion (USD12.8 billion) in loan guarantees for enterprises, and allow all firms to apply for the loan guarantee.
  • The loan ceiling for each company was raised to HKD6 million, from HKD1 million.

This was followed by another round of stimulus measures announced in May 2009 worth HKD16.8 (USD2.2) billion. It included HKD2 billion (USD256 million) for the housing sector:


  • Two months’ worth of rent for public housing will be paid by the government.
  • Tenants paying additional rent will only pay the basic rent.
  • For non-elderly tenants, the government will pay two-thirds of the rent.

Due to the two stimulus packages, the financial system remained liquid, allowing buyers to borrow from banks, sustaining confidence in the economy, and encourage the purchase of residential properties.

Transactions rose 10.6% from January to August 2009, as compared with the same period last year. This followed a 22.2% drop in sales transactions in 2008.

Support for the mortgage market helped

Following the global financial crisis, the government immediately implemented liquid-enhancing measures to protect Hong Kong’s financial sector:


  • In September 2008 to March 2009, the Hong Kong Monetary Authority (HKMA) increased the available access to liquidity assistance to banks, including longer borrowings from the discount window and foreign exchange swaps.
  • In October 2008, the Financial Secretary established the Contingent Bank Capital Facility (CBCF) to make available additional capital to banks. The CBCF will be in effect until the end of 2010.
  • In November 2008, the HKMA refined the September 2008 measures, increasing the maturity time of the debts in the discount window from one to three months.

The government’s rapid response successfully maintained confidence. Bank lending continued, indeed loans for house purchase increased 5.1% to HKD593 (USD76) billion in 2008.

Growth in housing loans is expected to slow in 2009, because the HKMA has now lowered the loan to value ratios (LTV) of housing loans to 60% for loans valued at least HKD20 million. For loans less than HKD20 million, the 70% ratio remains, but the loan amount is capped at HKD12 million.

The ratio of housing loans to GDP rose to 35.4% in 2008, the first time the size of the mortgage market has grown in four years. Yet most buyers continue to pay in cash during the pre-selling stage of the residential property development, according to major newspaper The Standard.

The Hong Kong Mortgage Corporation (HKMC) was created in 1997 to facilitate the increase in mortgages in Hong Kong. The HKMC achieves its goals by being a guarantor of mortgage loans, and by issuing its own loans.

Outstanding loans from the HKMC grew by 31.1% to HKD30 (USD3.8) billion in December 2008 from the previous year. To stimulate growth in borrowing in the mortgage market, the HKMC issued in October 2009 a Fixed Adjustable Rate Mortgage program. With the application period lasting until December 2009, borrowers can lock-in a predetermined interest rate within an agreed lock-in period.

Low interest rates for borrowers

The Hong Kong best lending rate, the basis for mortgage interest rates, is computed based on the US Federal Funds rate and the average of the interbank interest rate. To ensure liquidity in the economy, the HKMA implemented measures that affected the best lending rate:


  • From October 2008 to March 2009, the best lending rate would be set at 50 basis points above the US Federal Funds rate, while the interbank interest rate section of the computation is removed.
  • From March 2009 onwards, the interbank interest rate section of the best lending rate computation was reinstated.

The changes in interest rate policy caused the Hong Kong best lending rate to drop. While the US Federal Funds rate dropped to 0.13% in May 2009 from 1.5% in October 2008, the Hong Kong best lending rate fell to 5% in September 2009 from 5.25% in October 2008.

With the drop in the Hong Kong best interest rate, the interest rates of major banks are as low as 3.25% below the best lending rate, according to Bloomberg. This benefits most borrowers, as more than 90% of housing loans in Hong Kong are variable rate.

Big public housing sector

Hong Kong has one of the largest public housing sectors in the world. As of 2009, 47.1% of the total population or around 3.3 million people live in public housing. While 29.1% of Hong Kong’s population live in rental flats, 18.1% live in private flats subsidized by the government.

Public housing in Hong Kong began as early as the 1950s as a way to provide citizens affected by wars and calamities temporary housing. In the 1970s, the government changed its policy to provide permanent public housing.

The Hong Kong Housing Authority (HKHA) offers three ways to assist low-income families to purchase homes:

  • Home Ownership Scheme (HOS): HOS flats are subsidized by the government. Selling under the HOS scheme was temporarily stopped from 2003 to 2006, and was resumed in 2007.
  • Tenants Purchase Scheme (TPS): The scheme offered those in public rental flats to buy the properties at below market cost. However, selling under the TPS scheme was halted in 2005.
  • Home Assistance Loan Scheme (HALS): Since 2003, the government offered low-income families interest-free loans payable up to 20 years. After government evaluation, the HALS was stopped in 2004, and the HKMA only maintains the payments of the loans.

Recently, limited supply has pushed up prices

Since 2002, the Government (which owns all land in Hong Kong) has more tightly limited the supply of new land for housing purposes.  Housing completions have been falling. In 2008, completed dwellings decreased by 16.1% to 8,800 units, the first time in over two decades that completed properties in a year dropped below 10,000 units. The tight supply of new houses arguably contributes to the rise in property prices.

The fall in completed properties prompted the government in October 2009 to release an additional 1,000 units of old buildings for re-development. Real estate developers would apply for the usage of these buildings. Around 14,700 new residential units are expected in 2009.

Although completed dwellings dropped in 2008, actual production of public housing by the HKMA increased by 38.8% to 19,000 units. This is the second year of increase in the actual production of public housing, after the HKMA resumed the selling if HOS flats in 2007.

Poor yields in Hong Kong

In 2004 the government amended the Landlord and Tenant (Consolidation) Ordinance, effectively making Hong Kong’s landlord and tenant law pro-landlord. Tenants no longer have the right to renew at prevailing market rates, and it is easier for the landlord to prematurely terminate the tenancy agreement.

Though residential prices began to rise in January 2009, rents only began to increase in May. While house prices increased by 17.9% from January 2009 to May 2009, rents only increased by 7.8% in the same period.

The slow increase in rents caused average rental yields to fall to 3% in April 2009, according to Global Property Guide research. Residential properties in the New Territories generate the highest average yield of 3.7%. Properties in The Peak, Hong Kong’s most prestigious neighborhood, generate an average of 2.1% yield.

By Global Property Guide standards, yields are poor in Hong Kong. Yields issued by the RVD are comparable to Global Property Guide figures. But since Hong Kong yields have been low for the past fifteen years, the investment risks may actually be lower than they appear.


Hong Kong Apartment Gross Rental Yields (Ave. Jan-Sept 2009)

PROPERTY CLASS YIELDS
Class A - (40 sq. m. or less) 4.4%
Class B - (40 - 69.9 sq. m.) 3.6.%
Class C - (70 - 99.9 sq. m.) 3.2%
Class D - (100 - 159.9 sq. m.) 2.9%
Class E - (More than 160 sq. m.) 2.6%
Source: RVD

Pump-primed out of recession

After four consecutive quarters of contraction, the economy grew by 3.3% in Q2 2009, lifting Hong Kong out of recession. Overall, the economy is expected to shrink by 2% in 2009, but to bounce back in 2010 with 5% growth, according to the IMF.

The fall in exports and imports slowed to 12.8% and 12.7% in Q2 2009 from the previous year, after sliding by 22.7% and 21.4% in Q1 2009.

The decline in private consumption also slowed to 1% in Q2 2009 from the previous quarter, indicating the gradual return of consumer confidence. This followed the 6% drop in private consumption in Q1 2009.

"Price pressures should remain muted and, given our current outlook for global commodity prices, consumer price inflation should end 2010 close to zero," said the International Monetary Fund in its report.

Deflation in Hong Kong began in June 2009 with a 0.9% contraction in prices. In August 2009, the fall in prices accelerated to 1.6%.

       

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