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Hong Kong

Suppressed residential property demand and tight supply in Hong Kong market results in limited room for significant residential price correction


Hong Kong, 5 September 2012 –The resilience of the residential property market is not a bubble, but a realistic reflection of Hong Kong’s long-term economic fundamentals, according to Jones Lang LaSalle’s latest white paper on the sector. The paper pointed out that a large pool of end-user demand has been artificially suppressed, which is likely to provide considerable support for the residential market, and there is very limited room for any significant price corrections in the short-term future.

 

The paper highlighted that Hong Kong’s residential property prices have been sustained by a healthy labour market and solid income growth in the past few years despite global economic uncertainties. The historical high total employment and continued low unemployment rate, together with a substantial increase in the number of high income households, provides ample real income to support residential property demand and prices in Hong Kong.

However, the paper conducted by Jones Lang LaSalle also noted that although prices of residential properties have gained 13% from the start of 2011 to mid-2012, overall residential sales volumes have dropped from an average of about 11,000 per month in 2010 to only 7,000 per month over the past 18 months (January 2011 to June 2012). Such a divergence between prices and volumes, seen for the first time in 15 years, can be attributed partly to the Hong Kong government’s austerity measures, including Special Stamp Duty levied on short-term trades and a reduced loan-to-value ratio for new mortgages. In addition, a record-high number of marriages and births were registered in 2011, but has not been reflected in the volume of residential sales. As a result, it is believed that there is a large pool of demand that has been artificially suppressed in the residential market.
 

“This end-user demand, both new and upgrading, however, has been suppressed by government austerity measures and the wait-and-see approach of both prospective buyers and property owners in an uncertain economic environment. If the labour market does not experience significant downturn, the end-user demand accumulated is likely to provide considerable support for the residential property market,” said Joseph Tsang, Managing Director and Head of Capital Markets, Hong Kong.

The paper also pointed out that residential mortgages are actually more affordable now than prior to 2000 because of the low interest rate environment and sound income growth, which have offset the effect of increasing home prices for owners. Data indicated that although home prices and median income rose 8% and 25% respectively compared to 15 years ago, the burden of mortgage payment has been halved. Moreover, the real mortgage rate, after taking into account inflation, has been negative for nearly 2 years due to rising rate of inflation, which makes it conducive for end-users to enter the residential property market. On the other hand, negative real deposit rates and positive carry of mass residential units have encouraged investors to hold real estate and attract investors to allocate their wealth on residential properties.
 
In the meantime, the strong purchasing power from the mainland has become a long-term source of demand for large and luxury properties. The persistent appreciation of the Renminbi enables mainlanders to purchase Hong Kong residential properties at a lower cost, which in return has fuelled a strong demand for large and luxury residential properties from purchasers from mainland China. 
 
On the supply side, Hong Kong has been running on low levels of new residential properties since 2007 and this trend is expected to continue for the next two to three years. An estimated annual average of 12,200 new units is forecast to be completed from 2012 to 2015, compared to 25,000 units completed yearly from 1996 to 2000.
 

“So far, the pace of US economic recovery, the development of the European debt crisis and a slowdown in the Chinese economy have had limited effect on the Hong Kong residential property market. But the Hong Kong government’s policies might be a source of uncertainty. Unless the government drastically increases housing supply in the private market (which will take years to build) or introduces more radical measures which make property acquisition an irrational investment, we expect that further austerity measures will only suppress even more end-user demand in this prevailing market,” said Marcos Chan, Head of Research, Greater Pearl River Delta.

“Looking forward, we believe the prevailing market fundamentals are still favourable to the residential market and should continue to lend concrete support to end-user demand. The sales market remains relatively slow in the short-term, but we do not see room for any noticeable corrections in capital values,” concluded Joseph.​