Hong Kong Property: On Policy Risks20 June, 2011, 23:05. Posted by Zarathustra
Tags: Hong Kong, Policy Risk, Property, Real Estate
After the Hong Kong Monetary Authority further tightened mortgage policies and the apparent softening of government’s stance in resuming the home ownership scheme (HOS), the property market in Hong Kong went from quiet to ice-cold. On the surface, the policy risks seem to be rising.
Truth be told, my bearish stance on Hong Kong property market almost has nothing to do with policy risks, simply because I believe that government intervention does not work for most of the time. Many people now blamed the policy of 85,000 housing completion target for the steep and lengthy correction of the real estate market as the bubble bursted in 1997. The initial drop, however, has nothing to do with the housing target, of course. It was the Asian Financial Crisis. The housing target certainly made things worse in the years later, but it did not cause the drop in the first place.
Now, the government has learned from its “mistake”, showing reluctance to increase supply to meet the political “demand” (which is not reasonable). It is, in my view, a right thing for the government to do as I do not believe there is a genuine shortage of residential properties. In fact, I believe 15,000 units of private sector per year would be sufficient to keep the overall private sector housing stock at the right size. This is the reason why I don’t feel the government’s pledge to increase land supply as a threat for the real estate market in the coming years, because the increase is not sufficient enough to tip the supply-demand balance. I would feel quite comfortable with an annual supply between 15,000 – 20,000 units in the next 5 years.
The resumption of HOS, if that happens, will probably take some of the demand from the private sector. However, if building HOS flats means a one-for-one reduction of private sector flats, again, I do not see any huge change in the overall supply-demand balance as far as the total private sector housing stock is concerned. The impact on the property market at the moment, I believe, is more of a psychological once. Of course, I doubt if the government will resume building HOS flats.
Interestingly, even though no one has heard anything concrete about the possibility of resumption of HOS, the market has taken it quite badly. Property stocks tumbled in recent days, and we start to hear more price cuttings in the secondary market. The fear of more government interventions might be a catalyst, although my conjecture remains that rising macro risks are a more serious concern. We were in the beginning of the end of the current property cycle, thanks to the continuous monetary tightening in China which are spilling over to Hong Kong. Monetary tightening is reflected in the weakness in equities markets as well as slowing transaction volume of the property market even though prices remain resilient for the past two months.
The fear of more government intervention is a small catalyst for caution in the past week or so, but bigger catalysts will come from outside: hard landing in China, disorderly default in the Euro area, and slowdown in the United States. At the moment, my base case scenario for 2011 full year remains that property prices will be stable, with 0-10% rise for the entire year. Prices are currently within my bull case scenario, which means the property prices are coming very close to 1997 level. My latest judgment remains that the lower bound of my base case scenario will be a more likely outcome for the full year, implying a 10%+ correction possibly from this point.
Please be once again warned that if the global macro environment deteriorates in the coming months, I will be prepared to lower my forecast even further.