Bubble may be about to burst again, analyst says

PUBLISHED : Wednesday, 22 June, 2011, 12:00am
UPDATED : Wednesday, 22 June, 2011, 12:00am


Veteran property watcher Koh Keng-shing has gazed into his crystal ball and does not like what he has seen.

'I see history probably repeating itself and a correction looming large for the market,' said a sombre Koh.

Calling on lessons learned in a 30-year career in property sales, during which he headed the professional services desk of global real estate agency First Pacific Davies (now Savills Hong Kong), and was valuation manager for consultancy Jones Lang Wootton (now Jones Lang LaSalle), Koh said he now feared that a re-run of the 1997 market collapse might be on the cards.

'Weaker-than-expected land auctions, tightened government measures on mortgage lending and increased land supply. Does that sound familiar?' asked Koh, noting that similar events foreshadowed the 1997 collapse in the market.

Koh, who has been a member of the Royal Institution of Chartered Surveyors since 1990 and now runs the real estate agency he founded in 1995, Landscope Realty, says the June 9 auction of a luxury residential site on Borrett Road in Mid-Levels was a sign that developers were revising their views on recovery.

The site was sold at below market price estimates, and for Koh the outcome recalled the trigger point for the 1997 market decline when a residential site in Wong Ma Kok, Stanley was sold on June 3, 1997, for HK$5.5 billion, between 16 per cent and 34 per cent below earlier market estimates and just 6 per cent above the opening bid.

Koh said that ahead of that auction, sales volumes - especially in the luxury market - were regularly hitting new records. But in the wake of the disappointing auction result, sales began a decline that quickly gained momentum, helped downwards by the fact that the government had announced an increase in land supply aimed at lifting supply of new homes to 85,000 per year.

'Now, like then, we are seeing luxury home sales beginning to slow, even though prices remain high.'

On June 10, the government announced the launch of eight sites for sale, on which it expects developers to build 6,000 flats. The move coincided with an order from the Hong Kong Monetary Authority that banks should lend no more than 50 per cent on homes valued at above HK$10 million (down from a cap of 60 per cent).

The authority for the first time also added tougher restrictions on non-resident borrowers. Momentum is also building for the government to revive its subsidised Home Ownership Scheme, suspended in 2002. Koh said the resumption of the scheme would shorten the cycle, bringing the correction forward into the second half of this year.

'Things have certainly taken a turn for the worse,' said Lee Wee Liat, head of regional research at Samsung Securities (Asia). The government's willingness to resume building subsidised housing for sale, together with measures targeting foreign investment demand, showed a determination to cool the market down, he noted.

'A short-term correction is now possible.'

The latest data suggest a slowing in demand. Just 21 new homes were sold over last weekend - down from the 47 homes sold over the previous weekend, according to Samsung.

Secondary transaction volumes also fell to their lowest level so far this year, with just 21 flats sold at the 10 largest residential estates tracked by Midland Realty, down from 24 the previous weekend.

Developer Cheung Kong (Holdings) has lowered asking prices at its Uptown apartment block in Yuen Long by between 5 per cent and 8 per cent, putting new average selling prices in the range of HK$5,300 to HK$5,500 per sq ft, noted Lee in his latest research report.

But the pessimistic views are not shared by all industry players. Among the optimists is Nicholas Brooke, chairman of consultancy group Professional Property Services.

'Although the government intervention is likely to bring about some cooling in the short term, I think once this is absorbed by the market we will see renewed activity, albeit at a slower pace, in that the reality is that nothing has changed so far as the fundamentals are concerned,' Brooke said.

'I honestly do not foresee a bursting of the bubble as many describe it, but rather a gradual calming of the market as result of the combination of government intervention at both the supply and demand end of the equation, as well as a function of the likely hike in interest rates.

'The market will probably plateau by mid-2012 and there may be some downward adjustment thereafter, but I do not see this as major, given the wide international interest in Hong Kong real estate as a long-term investment medium.'