TOP PICK: Young revisits the factors affecting HK residential property prices
Global uncertainty: The global economy has continued to be challenging since the turn of 2012, with the deterioration of the Eurozone, weak recovery of the US, and slowdown in the growth of the Asian region. All these are leading many economists to forecast another serious global financial crisis that can be as bad as or worse than that of 2008.
Asia slows down: In the Asian region, we have seen month after month of downward revisions of gross domestic product (GDP) forecasts for most Asian countries, including those of China and India, as well as weaker production and export demand caused by the Eurozone and US markets.
On the whole, the above has resulted in continued negative sentiment in the global markets and reduced investment activities in property across the globe. In some European countries and parts of Asia Pacific, we are continuing to see a softening of property prices which may in turn present buying opportunities.
HK powers ahead: Albeit the continuous downturn of the global economy, Hong Kong property prices on the whole in 2012 have seen a rise thus far.
Firstly, Hong Kong’s economy continues to be relatively stable, driven by the fact that it consistently ranks in the top five as a financial centre. In 2011, Hong Kong was ranked number one for the first time in the World Economic Forum Financial Development Index, overtaking the US and UK.
This unique position continues to attract global multinational corporations (MNCs) to set up regional offices or global headquarters in Hong Kong. Recently, General Electric (GE) has selected Hong Kong to be the new location for its global headquarters. This trend along with a number of large IPO listings such as Prada and GAP Inc will continue to contribute to Hong Kong’s population growth, creating more demand for property.
Interest rates in Hong Kong are at a historical low, currently in the range of around 2.1–2.8 per cent. This is due to the fact that Hong Kong’s money supply is more closely linked to US where interest rates are at an all time low. This has led to cheaper cost of borrowing money, helping to strengthen property purchases as many buyers now find servicing a mortgage cheaper than paying rent. In May, the amount of loans drawn down increased by 11.6 per cent over April according to data from the Hong Kong Monetary Authority.
Buyers are often concerned about the interest rate movements and forecasts in the future as interest rates may move during the term of the mortgage depending on changes to the prime rate or Hong Kong interbank offer rate (HIBOR), which is not always easy to forecast. However, considering the global and US economies, and the time likely needed for a full recovery, it would seem unlikely for the interest rates to increase in the next two to five years.
Hong Kong continues to see stable rental fundamentals in the residential property sector driven by steady population growth, limited land supply and changing demographics where younger generations are becoming more career-minded and starting families at a later age. In addition, some home owners have adopted a speculative strategy of selling their properties and reentering the rental market, in hopes that property prices will plummet before buying again.
Thus far in 2012, we have seen relatively strong property sales data especially in the new property market for developments marketed at a reasonable price range. More recently, Cheung Kong Holdings Ltd sold over 200 units in one weekend of its new development in Tseung Kwan O. The secondary market has been slightly weaker in terms of sales.
The Hong Kong government led by new chief executive Chun-ying Leung, who was sworn in on 1 July 2012, has on its agenda among other matters the need to improve the quality of life and housing affordability for Hong Kong residents. For many years, the government has been criticised for the widening wealth gap between the rich and the poor. Hong Kong now has the largest wealth gap in the world amongst developed cities according to Hong Kong‘s Census and Statistics Department.
In addition to this, ordinary Hong Kong citizens complain that houses in Hong Kong are not affordable, as prices have been soaring at a much faster rate than that of salary increases; on average it would take 10 years to save up the deposit alone.
Although the government is currently working on strategies to address these, the current plan appears to focus on increasing affordable housing supply in selected areas in the New Territories and other less densely populated areas.
Given that causing a downturn in the property market would not be in the interest of the newly formed government, these strategies are not likely to cause a plummet in the property market overall.
From looking at the above and other factors, it may seem that the global economy can expect to remain weak or deteriorate further in the second half of 2012, with a possibility of this extending to 2013, causing downward pressure on property prices.
Property prices generally run in cycles, so it is possible that we may see some readjustments in the market from time to time. However, from a medium-to long-term view, it may be reasonable to expect that Hong Kong’s residential property market will continue to experience steady growth.
William Young is Senior Project Director of MIPIM Asia, Real Estate Division, based in Hong Kong.