Tony Tsang (Research Analyst)  Jason Ching, CFA (Research Analyst)

Residential prices likely to see a 30-40% correction in the down cycle ahead

We hosted an investor luncheon with Easy Property’s Managing Director, Mr Denny Wong, who is also the co-founder of Centaline. Mr Wong believes that the pillars used to support the strong residential market, including tight supply and low interest rates, have faded out. Together with the government’s tightening measures, residential prices are set to fall. However, a trigger for the turning point of the cycle is yet to emerge; consequently, prices have been holding up well. While prices for smaller units even continued to rise, this does not represent the overall market. Based on previous cycles, Mr Wong expects to see residential prices falling by 30-40% in the upcoming down cycle.

Strategic goals for the government to maintain the current measures

Mr. Wong believes there are a few strategic reasons for the government to implement the current tightening measures, namely the Special Stamp Duty (SSD), Buyers’ Stamp Duty (BSD) and Double Stamp Duty (DSD): 1) depress demand from non-local residents by BSD, so that local buyers have a priority to buy when supply remains tight; 2) control the property bubble from growing further as a means of reducing the adverse impact on the economy when the bubble ultimately bursts; 3) buy time, as it will take a while to increase new supply; and 4) change buyers’ expectations on future pricing.

Aggressive price cuts by developers imply they are bearish on the outlook

SHKP initiated the turning point in pricing strategies upon re-launching its The Cullinan in Oct-13 at an effective price cut of 40%, by factoring in rebates and other incentives. Following that, The Austin was launched at an effective 30% below secondary projects nearby. Subsequently, developers are mostly adopting rebates and incentives as a mainstream marketing strategy on latter launches. Most importantly, pricing in the primary market is now at a discount to that in the secondary market, and buying demand is flowing to primary from secondary. Mr Wong believes this is a strong signal that developers (as they have better access to market information) are holding a bearish view on the outlook for the residential market ahead.

The myth of why prices for smaller units continue to see new highs

Smaller units (i.e. those with a lump-sum price of less than HK$4m) continue to outperform, with prices continuing to see new highs. Mr Wong believes this is due to smaller units being exempted from the government measures (as buyers are mainly first-time buyers), buyers being able to get LTV of up to 90%, supply in the secondary market tightening, and investors shifting their focus to this segment. However, Mr Wong thinks this is only a small segment and should not represent the overall market. Moreover, with many buyers of smaller units being engaged in the sectors that are adversely affected by the Occupy Central protest, they are vulnerable to any market shocks ahead.

Previous cycle suggests that price correction can be substantial

Mr. Wong cited that the Hong Kong residential market historically follows the typical cycle of expansion, boom, recession and depression, that once prices have peaked, the subsequent price decline in the downward phase could be very significant. Previous cycles suggest that a price correction of no less than 40% is evidenced from the peak to trough of the cycle. 

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