House prices could fall by 45pc
Home prices in Hong Kong could slump as much as 45 per cent over the next two years in a worst-case scenario, Barclays Capital Research warned yesterday.
'In a hard economic landing, a deflationary economic environment of rising unemployment, falling incomes and weak homebuyer confidence would, in our view, cause a 35-45 per cent correction in prices,' said analysts Andrew Lawrence and Vivien Chan at Barclays in a report released yesterday.
The report came almost a week after a warning by Financial Secretary John Tsang Chun-wah that the European debt crisis and stalling US growth could affect Hong Kong.
Tsang also said two weeks ago during an official visit to Beijing that he expects Hong Kong's economic growth to ease to about 4 per cent in the third quarter, as exports wane and the uncertain global economic outlook takes its toll. But he still expected 2011 GDP growth to reach five per cent, at the lower end of an official forecast of 5-6 per cent.
Echoing a bearish forecast in April, Barclays warned of a property decline of up to 30 per cent under a 'soft' landing scenario involving a slowing economy and rising mortgage rates - an increase of 200 basis points, or two percentage points, over six months, and a further rise of 175 basis points in 2012.
In the soft landing scenario, higher borrowing costs would price first-time buyers out of the market and discourage existing homeowners from trading up, causing a 15-20 per cent decline next year and a 10 per cent slump in 2013.
Rising mortgage rates and a weakening economic environment have clearly hurt homebuying sentiment, it said. Consumers are increasingly deferring homebuying decisions and preferring to rent, reflecting both a lack of affordability and a belief that property prices will be lower in the next 12-24 months, it said.
'Under a hard landing scenario, we would expect Hong Kong to face a deflationary economic environment: rising unemployment, falling incomes and weak consumer confidence. Such an external shock would likely cause property prices to over-shoot long-term fundamental price support levels,' the report said.
Such a hard landing scenario would be created by falling household incomes and shrinking confidence, the authors said. A wider relaxation of the mainland credit environment and a rally in the US dollar would be likely contributing factors.
'A strong US dollar has historically been negative for Hong Kong property prices and stock prices,' the report said.
Some existing homeowners would be forced to sell due to rising unemployment, increasing supply to the property market at a time of little demand. Barclays said a hard landing could see mainland money flows reverse, and weaker demand and rising secondary supply undermining the market.
'This would suggest that residential property prices would fall 35-45 per cent over 2012 and 2013, which implies a relatively optimistic two to two-and-a half year correction period before prices were to bottom ,' it said.