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Property bubble has burst, and it's a long way down to the bottom

A gaming-industry maxim has it that the success of big casinos depends on the depth of their local market.

Macau, in this sense, works because its natural breadbasket, the Pearl River Delta, is home to 50 million or so relatively well-heeled urbanites within an hour's drive or ferry ride away.

From the perspective of casino developers, that's a deep enough market to justify the bulk of the billions they have sunk into their projects in Macau so far.

But from a property developer's point of view, things aren't looking quite so rosy. The same maxim applies, but 'local' takes on a more immediate meaning in the property market.

Buyers from Hong Kong or across the mainland border are at best planning to use their Macau flats as secondary weekend homes. In most cases, they are taking a speculative punt in the hope they can flip the flat for a quick and tidy profit. But with recession now a reality in Hong Kong and the economic prospects for Macau and the mainland grimmer, many of those bets are about to turn sour.

As in Hong Kong, speculators in Macau residential real estate favour 'confirmor' transactions, where the buyer of a flat resells it to a secondary purchaser before legal completion of the initial transaction.

But things in Macau have got out of hand, even by Hong Kong property-punting standards.

The first chart shows the number of confirmor transactions as a percentage of total residential sales for both Hong Kong and Macau, as compiled by Citigroup. More than 40 per cent of all apartment sales in Macau during the first nine months were confirmor transactions.

But here is where sure bets turn into losing bets. The average sale price of Macau flats completed since 2000 dropped to 2,969 patacas per square foot in the three months to September, down 20 per cent from 3,734 patacas in the fourth quarter of last year. New data is not available, but you may have noticed that things have got a lot worse since September.

It's a game of musical chairs: the song has stopped and a lot of people are going to be left standing without a seat.

Worse still, the downward spiral in Macau's residential market will take much longer to find its floor because so much of the froth now being blown away was generated by outside speculators.

Remember the importance of a deep local market? Macau's now looks about as shallow as a children's pool.

The second chart shows average mortgage payments as a percentage of average local household incomes in Macau. In short, if the average Macau family bought the average Macau apartment during the third quarter, its average mortgage payment would represent 66.5 per cent the family's income. That statistic suggests Macau is in for a significantly above-average real-estate downturn.

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