• Sun
  • Jul 27, 2014
  • Updated: 4:01am
Monitor
PUBLISHED : Thursday, 18 July, 2013, 12:00am
UPDATED : Thursday, 18 July, 2013, 4:17am

A property slump will affect the whole of Hong Kong's economy

Last week Monitor argued that the gradual tapering of quantitative easing and the eventual increase in American interest rates that will follow are likely to trigger a slump in Hong Kong property prices of 30 per cent or more.

That might sound like a good thing. Lots of families would like to buy. But with the minimum down-payment on a typical Hong Kong flat now equal to four years of median household income, many have been priced out of the market. To them, forecasts of a property slump are welcome.

But property prices do not fluctuate in isolation. In a city where the property market contributes a fifth of our gross domestic product, a big fall in prices will inevitably affect activity in all other sectors of Hong Kong's domestic economy.

First of all, a property bear market will erode consumer demand. With residential mortgage debt currently standing at 46 per cent of Hong Kong's GDP, a decline in the value of flats would have a big effect on household balance sheets.

For the hundreds of thousands of families paying off a mortgage on their flat, a fall in property prices would undermine the value of their assets relative to their liabilities, making them less inclined to go out and spend. That's not all. Falling property prices - and even the fear of falling property prices - will also affect the stock market, as the share prices of developers take a beating.

We've seen this factor at work recently. Even though home prices are up by 3 per cent over the last six months, the Hang Seng properties index of leading developers and landlords has dropped 15 per cent as investors anticipate falling profits over the next couple of years (see charts).

That hurts, because a weaker stock market makes investors feel less wealthy, adding to their reluctance to spend on big-ticket discretionary purchases.

Together, the direct impact of falling home prices and the indirect effect of a weak stock market can make a significant difference to consumer behaviour.

According to Marcella Chow at Bank of America Merrill Lynch, a 15 per cent decline in Hong Kong property prices relative to the prices of other goods and services knocks between 1 and 1.5 percentage points off the growth of private consumption spending.

A weak property market also hits investment. Most obviously, falling sale prices mean thinner margins for developers, which make investment in new construction projects less attractive.

But there is a second order effect, too. A softer property market weakens companies' balance sheets and chips away at banks' asset quality.

That makes companies nervous of investing, and banks less willing to lend to fund investments, especially in a city where the owners of small companies commonly put their own flats up as collateral against business loans.

Putting these two effects together, Chow estimates that a 15 per cent decline in the property market cuts private investment by almost 4 percentage points.

A decline in the value of flats would have a big effect on household balance sheets

On top of that, falling property prices eat into the revenues of the Hong Kong government, which both directly and indirectly relies on the property market for as much as a third of its income.

That shouldn't trouble officials too much, considering they have enough accumulated reserves to cover years of budget deficits.

Even so, the overall effect of a slump in the property market on Hong Kong's economy would be severe.

Chow is forecasting a 5 per cent decline in property prices this year, followed by a 15 per cent fall next year; a fall she expects to knock a full percentage point off the city's GDP growth in 2014, reducing it from 3.8 per cent to just 2.8 per cent.

So maybe a property market correction isn't such good news after all.

tom.holland@scmp.com

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This article is now closed to comments

babyhenry
If HKer's got the guts to stick Tung property crash, HK will have been a much better place. But is garbage like these that eventually put "popular" tsang on and drove property to new highs.
If HKer's suffer they have no one to blame but themselves. They were given an opportunity to restructure this twisted economy of property dependent drug addiction, and they demanded it during the hand over, but once your wish is granted, they flipped and turn their backs on their own demands and hyprocritically demanded responsibilities from Tung.
Tom is right take away the drug those fools & parasites (agents) will be out in force looking for blood.
m2leung
1. HK's property price has been artificially inflated by the USD peg. We need the free market to control home prices. This means dropping the peg and the artifically low interest rates that comes with it. Hong Kong's market driven interest rate would be higher than what the rate is today. We are not USA - our economy is inflating too fast, and we have no real GDP growth
2. HK is in serious need of deflation. Coupled with the USD peg, we also suffer from a devaluing purchasing power due to the RMB appreciation in the last decade. What is the point of having 5% GDP growth but a 5.5% inflation?
3. People who did not listen to the government and not buy homes (John Tsang started his warnings as early as 2010) should be ready to commit suicide by coal burning when their home equity goes into negative. I have no sympathy for these people who do not do proper financial planning and risk analysis when making their home purchase. Speculation should not be rewarded. Greed should be punished.
Dai Muff
Also, negative equity doesn't matter as much when you are genuinely buying a home to live in. It is the speculators who scream the loudest.But then this society cares more about the speculators than the people living in bed spaces and subdivided apartments. Rent controls are not unreasonable. We had them for years, and the sky did not fall.
jasonbrockwell
The end of cheap credit will slow things down? You may be right!
lamlm38
tom ought to have his private anatomy kicked!!! his balls namely !!!
HK-Explorer
Hopefully the government once they see property prices have fallen by 10% will stop this over building and reduce all the controls currently in place such as double stamp duty etc... The government measures should just be temporary. Prices may still drop but at least free market will be back.
Fall in property prices will impact allot of people but help virtually no one. People wont see their houses if prices drop 30%. It will just be technical down but not an actual one where people rush to sell like in SARS. People still need a place to live.
HK_eh!
It's articles like these that try to influence the "sheeple" to think we can't let property fall because it will hurt your living. Irresponsible.
Do you think the property market/prices is healthy for the HK people and their earning power?
There is no pain free adjustment, but like going on a diet/exercise program to lose weight, if it's the right thing then take the pain and effort to do it or risk a worse blow up situation later.
aplucky1
another self serving article
ok tom holland reveal your property holdings in hong kong, just like your other slanted journalist buddy van der chump
will bet everything you are at least holding one or more properties in hong kong
you and van der chump spout from your ivory towers about "transparency" so be transparent , what are you holding now
Dai Muff
But what you are forgetting is the dampening effect these absurd property prices have on our economy: the businesses shutting down because their landlord has doubled the rent, the inability of our young and creative entrepreneurs to be able to afford premises; the fact that if you go to a restaurant or even buy anything, a very large percentage of what you pay is going to a landlord who is doing nothing useful, constructive, or innovative for society whatsoever. Our tendency to put property above everything else just dampens everything else. A property boom affects the whole of Hong Kong's economy too, and not necessarily for the better.
johnyuan
Let Hong Kong free from property price control. Let inflation delivers our prosperity because property owners will feel happy and spend. Some studies said so. Then everyone or the entire society will benefit presumably through trickling down theory. So easily done just be greedy and speculative on property by any fat cat. Voodoo economy to the core -- new version and I wonder if US or any other country or place also wants to give it a try. A property price correction shouldn’t be called so negatively as a property slump. It is colored by prejudice and vested interest. Hong Kong will become better environmentally at least when property addiction comes to an end.
......
There are many other ways people can feel happy with or without spending. A urban park at the Kowloon West landfill, for an example.

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