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

Residential prices are set to see a marked decline ahead

We hosted an investor luncheon with Easy Property’s Managing Director, Mr Denny Wong, who is also the co-founder of Centaline, one of the leading real estate agency chains in Hong Kong. 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. On the back of the various government measures, the increase in new supply and the interest rate hike cycle drawing closer, Mr Wong believes that the residential market in Hong Kong is set to enter a downward cycle. 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 the 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; 4) as non-local buyers and company buyers make up an aggregate 23% of demand, suppressing such demand is an effective source for stopping prices from surging further; 5) the SSD covers a period of three years, and coincidentally matches with the record-low interest rate period indicated by the Federal Reserve in the US; 6) various government officials to verbally discourage buyers from buying property at current price levels; 7) 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 later 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 of the residential market ahead.

High development cost has nothing to do with property prices

Some market participants are pointing to the fact that, as development costs are increasingly expensive (HK$4,000/sf for mass residential and HK$8,500/sf for luxury residential), there is little scope for property prices to fall. However, Mr Wong believes that this belief is against the economic theory, as prices are determined by supply and demand, not costs. Indeed, there have been numerous examples in past cycles that developers register losses when they ultimately launch the project for sale. 

- To be Continued -