Hong Kong Property Market Trends: A Bubble which you are not part of?

Contributed by Laveco Ltd. [www.laveco.com]

Hong Kong is, beyond doubt, one of the most cosmopolitan cities, with a very distinctive atmosphere, and a property market which has the experts very much divided. Real estate prices have increased by approximately 70 percent since the start of 2009. According to the Hong Kong Rating and Valuation Department, property prices in 2011 were up 20,6% from 2010.

Nevertheless, some say that the fundamentals of the property market are not as strong as people think. 108,814 properties changed hands in 2011, down 33% from 2010 (162,739) according to data compiled by one of the largest Hong Kong based real estate agencies, and this volume was the lowest since 2006. The database of the Land Registry shows that home sales decreased 10,3% month on month to 4,301 in December 2011, which is the lowest since November 2008.

The Hong Kong real estate market may now be entering a correction phase, as many experts are predicting a 25% to 30% fall in property prices in 2012. In the past few years the record low interest rates and the large number of wealthy buyers – mostly from  mainland China – pushed up the market prices, but for the time being, with the solution to the European debt crisis still unclear and a special stamp duty imposed by the HK government in 2010 on quick re-sales (short term property sale tax) the increasing trend is by no means certain.

The financial institutions have started to raise mortgage rates on new loans (based on the HK Interbank Offer Rate-HIBOR) but Hong Kong’s interest rates have remained very low – almost zero - due to the quantitative easing in the USA as HK dollar is pegged with US dollar. The current very low interest rates are clearly neither sustainable nor supportable. Hong Kong’s widely open economy means the city is exposed to the effects of the global crisis, and nobody knows when the interest rate is going to rise.

What everybody wants to know is when the peak in the property market will come. Maybe it won’t come all the time that money is coming in to Hong Kong, and the interest rates stay low regardless of the origin of the amounts. The “cheap money” drives the investors into risky assets and pushes up real estate prices. Therefore, the real question regarding the property market seems to be when there will be an outflow of funds from Hong Kong, since in this case interest rates will rise irrespective of US interest rates.

Despite the relative indecision of the Hong Kong real estate market, the number of companies being formed in Hong Kong has continued to increase.

March 2012

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