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  • Sep 18, 2014
  • Updated: 3:43pm
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PROPERTY

Hong Kong home prices could fall 45pc: Midland-controlled agent

HK Property forecasts that taxes, higher interest rates may spark a major plunge in the market

PUBLISHED : Thursday, 18 July, 2013, 12:00am
UPDATED : Thursday, 18 July, 2013, 4:17am

Home prices could fall as much as 45 per cent over the next three to five years amid higher property taxes, rising interest rates and a bleak outlook for commercial property, says one real estate agent.

Hong Kong Property, controlled by Midland Holdings, the city's only listed real estate agent, made the bearish forecast yesterday.

"The property market has been severely hurt with sales volumes declining sharply after the introduction of the extra stamp duties," said Jeffrey Ng Chong-yip, senior executive director at Hong Kong Property.

The city will enter an era of higher interest rates once the US Federal Reserve's curbs its stimulus, Ng added.

Over the past 23 years, Hong Kong's mortgage rate has averaged 6.2 per cent, with an affordability ratio of 45.7 per cent. The measure is the ratio of mortgage instalment payments to household income.

If mortgage rates increase from their current 2.3 per cent to 6 per cent, Ng said home prices would have to drop 27 per cent in order to maintain an affordability ratio of 45.7 per cent.

With the government stepping up measures to cool the market, Ng said average monthly transactions in the secondary market could drop to 4,500, a level close to that during Sars in 2003.

"In the worst scenario, home prices will drop by as much as 45 per cent," he said.

The more than 10,000 people who bought homes at peak prices last year risk falling into negative equity, he said.

Meanwhile, property consultancy Cushman & Wakefield forecast growth in rent for grade A offices in Hong Kong to slow to 0.5 per cent in the second half, from 1.4 per cent in the first half. Grade A office take-up would shrink to 1.2 million square feet in the second half from 2.1 million sq ft in the first six months of this year, the firm predicted.

It also said rents in Central would bottom out toward the end of the year or early next year, after declining 3.5 per cent in the second half of this year. Prime grade A offices will drop about 4 per cent in the second half, it forecast.

"Transactions will involve mainly small- and medium-sized companies which want smaller spaces of about 4,000 to 6,000 sq ft only," the firm's head of commercial properties, Gary Fok Cho-ping, said.

Michele Woo Wing-sze, Cushman & Wakefield's head of retail, said retail rents had already peaked. Retailers had become more cautious in the last few months, with fewer new leases in prime locations and higher vacancies in secondary locations.

Thousands of property agents marched to government headquarters at Tamar in Admiralty earlier this month to urge the government to withdraw property market measures designed to curb soaring prices.

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This article is now closed to comments

econometrican
It seems a replay of the 2007 episode in an Asian flavor. As an old saying, nothing can be forever. It’s just a matter of time. As soon as Fed starts its "tapering" approaching the end of 2013, the financial market will see it monumental shift in 2014. The first being hit will be those “too-good-to-be-true” credit markets. Be alert if you are living in a real estate bubble. Bubble can be fatally attractive, and almost anyone in the market can be fooled by its colorful, but few like to admit that it can burst anytime. Ask many American home owners, no kidding!
oasis
Lets add a related question - does anyone see rents dropping by 45%?... Considering property values as a function of interest rates, rental yields, and sentiment, among other factors, this is worth considering as well.
gianna.cheng@yahoo.com
Caractacus has a good point, unless the source of the information in the article is the "people" that would presumably buy. Kind of like pump and dump only inverted.
@madams
Wow, property agents are protesting? Whose next child molesters and triads? While the high property prices are often laid at the door of mainland chinese, local budding property tycoons are given a pass. At my kids very middle-class school several parents I am friendly with own several apartments -- 5 or more!! This property hoarding leads to shortages. It also leads to odd behaviors, for example, the seller may not be moving or buying a new flat so they can wait for better offers, completely frustrating the buyer. Overall the property market seems efficient but if you have tried to buy (a first home), you know it is totally dysfunctional.
What HK needs is proper property taxes. Sounds awful, but property taxes have been shown in academic studies (see robert schiller) to be one of the fairest taxes. Way more fair than income taxes, which are often regressive. Property taxes will significantly affect the attractiveness of holding apartments vacant or hoarding properties.
At the end of the day the gov needs to have the courage to take on the property developers. Right now when so many ex gov ppl end of in the employ of tycoons this independence seems aspirational only. Taxes is something maybe they can implement.
m2leung
1. If we leave our interest rates up to the markets (and not peg our monetary policy to the US), we would be much closer to the 6% mortgages instead of the artificially low 2.6% right now. The peg does more harm than good for Hong Kong. And if our finance sector goes missing without a peg, so be it. We don't need to support 100,000 bankers on the backs of 7 million residents
2. I look forward to the day when people in negative equity burn coal/jump off buildings just like in 1998. People who did not listen to the government about not entering the property market should be punished. John Tsang told us not to buy property ever since 2010. People who speculate or "invest" in homes should be punished
3. Contrary to popular belief, there is sufficient supply in Hong Kong. Many homes are vacant because investors can afford to idle their homes. Our holding costs for homes is too low due to the low interest rates and lack of a wealth based property tax. Investing in homes should be something we as a society should deter
Giwaffe
While it will be a painful nut to swallow for those who bought at any peaks, many probably did so because of necessity (getting married, etc.). As a caring society, I believe we can all share the cost of the property market readjustment by improving our mortgage laws. Mortgages are currently full recourse (correct me if I am wrong for those legal professionals out there). What this means is that the borrower is liable for any remaining balance on the mortgage after the bank has foreclosed on and disposed of the property. In other words, the bank can still go after you after you walk away from the mortgage.
The problem with this arrangement is that it seriously skews the risk balance to greatly favor banks, providing them with practically risk free revenues. Banks, like any other business, should not be earning revenues risk free, and the law should not particularly favor banks. In order to restore the balance between borrowers and banks, the law must be amended to mandate nonrecourse mortgages. Banks would only have the property as security for the mortgage. In the case of default, the borrower would only lose the property.
Giwaffe
The reason for this is twofold. One, borrowers ought to have the choice to walk away from a mortgage, especially in a substantially negative equity situation. Already, they would have lost their 30% down payment, so to enslave them through full recourse loans is draconian. Two, banks are already protected from lending risk through the 30% cushion and any interest earned/principal repaid. As a business, banks should not be exempt from facing risks.
aplucky1
I am so worried about the 10,000 people who will be under water
this is like worrying about the idiots who bought hk bank at 150/share
avfontaine
@jve. I believe that the GSD is calculated on the gross income of the homeowners and you are right that 33% is the upper limit in places like Canada. However, when it comes to paying ones mortgage, this is done with "net" income, i.e. after tax income. So in Canada where the tax rate can easily go to 50% for the upper bracket, the net take home pay is much smaller than in HK where the income tax upper bracket stands at 16%. I guess that the average tax in HK would be quite low, probably around 10% while it is probably around 25% in Canada, UK, etc. Therefore a GSD of 33% in Canada would be equivalent to a GSD of 45% or more. So if it were calculated on net income, it would be probably the same...
Giwaffe
Although the Canadian equivalent GSD would be 45% or more based on higher taxes, I think it's important to note that individuals in Hong Kong have to pay for services which are "free" (included with the taxes you pay) in Canada, such as healthcare and education. I would estimate the GSD for Canada would be approximately 33% if this is adjusted for.
Puddy
If this is indeed true. Then good.
Significantly lower property prices will make the city more competitive.
High property prices has prohibited new enterprises and discouraged foreign investment.
It has also skewed the whole economy towards properties.
This is precisely the type of change needed in Hong Kong.
radianhk
HK mortgage rate averaged at 6.2% over past 23 months?? Guess it should be 2.6% instead.
charlie212
Great way to try to get some sales going there Hong Kong Property ! You are one person who doesn't know the future. Yes prices may go down 45 %, --- actually prices may even go down 80-90% but also they actually may even go up 40-50% or even 75%. This is a purely speculative article trying to drum up business.
caractacus
How can this article encourage people to buy?
philipharsh
Prices would only fall if something serious goes wrong across the border or other International events that cause significant unemployment in HKG. It's impossible mortgage rates would go up significantly. Word has come to an special era from where economic growth activity would happen only if the rates are kept ultra low with loose monetary base. No political power can afford to see Asia falling as Europe.
impala
Ah I see... so basically, this time is different, right?
samsaxena
For the luxury segment (apartments larger than 800 square feet), households are already spending 75% of their pre-tax income on monthly mortgage payments. Also, for this segment, the vacancy rate is almost 15%! You do the math, but when rates go up by just 200bps, mortgage payments will rise by 30%!!! It will get ugly!!!
impala
Clarification that is absent from the article: what is called the 'affordability ratio' here (the 45.7%), is normally more precisely named the Gross Debt Servicing (GSD) ratio (or sometimes Total Debt Servicing Ratio if you also include potential other debts, a minor consideration in Hong Kong): the % of household income spent on mortgage payments (interest+amortisation). All based on averages of course.

Mr Ng perhaps forgot to mention that a GSD of 45.7% is already incredibly high. A 30% GSD is normally seen as the benchmark, with most jurisdictions that actively use this ratio (UK, Canada and others) seeing 33% as the upper limit for healthy lending.

So here we are... interest rates can't realistically go in any direction but up, and even under those really low rates, we have a GSD of nearly 46%. Let the games begin. Morituri te salutant.
 
 
 
 
 

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