Reading the wrong signs

PROPERTY market watchers have been testing the enthusiasm of end-users with the kind of intensity that a paramedic might check for vital signs on a poorly patient.

SG Warburg Securities has come up with a report suggesting investors need to watch one particular piece of the end-user cake in coming to any firm conclusions on the Hong Kong property market's heartbeat.

New residential property prices have come off more than 35 per cent since their peak in March last year.

In the year to date, the sector has seen a flurry of activity in a post-Lunar New Year rush.

This was reflected in last month's property sales where the Land Registry recorded 12,964 sales, up 73 per cent on March.

Property watchers are worried the post-Lunar New Year rush is dying out.

SG Warburg's analysis suggests all the recent excitement in residential property might have been focusing on the wrong buyers. Rather than watching the buying appetite of the new end-users coming into the market for the first time, a critical segment of the market that might have been ignored was secondary-market buyers.

Under the Warburg analysis, the problem with the rush was the significant penetration of new end-user buyers.

Flats apparently were being snapped up because the property developers had built up excess stocks and needed to get them sold. To do this, of course, they placed prices at a discount.

The level of discount was such that it affected the ability of potential secondary-market buyers to sell off their flats ahead of buying a new one in a bid to upgrade their living quarters, or property investment.

No wonder anecdotal evidence suggests there is a slowdown in property activity, which affects the market about this time of year in any case.

The market cannot sustain buoyant levels of activity on new end-users alone.

The bottom of the property cycle might be hit the moment secondary-market users become active again.

This is because new flat prices will not be competing on the same level as the secondary-market sellers. Secondary-market buyers therefore remain inactive - they do not have to sell their old flat but they cannot buy a new flat.

The resurgence of secondary-market activity is not expected to happen for three to four months yet, but when it does, rest assured this signals the recovery in new flat prices has started.