Hong Kong buyers see homes as hedge against inflation, say analysts

Analysts say in a low-interest rate climate, people want to protect their savings and will still purchase homes despite any cooling measures

PUBLISHED : Wednesday, 19 September, 2012, 12:00am
UPDATED : Wednesday, 19 September, 2012, 3:18am

The Hong Kong property market looks set to brush aside the latest policy measures aimed at slowing price increases as buyers turn to homes as a hedge against rising inflation, say analysts and estate agents.

"What people fear most is not policy measures, but seeing their savings devalued by inflation," said Lee Wee Liat, head of property research at investment brokerage BNP Paribas Securities.

As long as interest rates were at a near-zero level and home lending rates remained at around present levels of 2.5 per cent - compared with an inflation rate that reached 4.2 per cent in July - people would consider buying property as a hedge against inflation to protect the real value of their savings, he said. "With low interest rates likely to be extended into 2015, no significant property price correction is likely," he said.

He expected home prices to increase by 10 to 15 per cent until there was in increase in housing supply in the market from 2014 onwards. While that would represent a slower rate of growth it would not reverse a steadily rising trend in prices.

The city's home prices have climbed 15 per cent so far this year and 89 per cent since January 2009. In May this year, they passed their previous record high set in 1997, as measured by the Centa-City Leading Index.

The recent move by the Hong Kong Monetary Authority to tighten lending conditions on second mortgages might prompt some cash rich investors to bring forward their home purchase as they could be wary of further restrictions that might be imposed in the next few months. "That would explain why home prices are unlikely to fall," said Lee.

The banking regulator announced last week that borrowers who have more than one mortgage may borrow a maximum of 40 per cent of their monthly income, down from a previous 50 per cent. Property buyers from outside Hong Kong with more than one mortgage are also now subject to the lower loan-to-property value ratio ceiling.

The HKMA also capped the repayment period on all new mortgages at 30 years. Some banks have been offering 40-year mortgages, but the authority was worried that the extended term was risky.

Eric Wong, an analyst at investment firm Bricks and Mortar, forecast that flat prices would increase 8 per cent in the next six to nine months.

"The latest measure will discourage those reliant on excessive leveraging for property investment. But it will have a minimal effect on end-users," he said, adding that a more effective way to bring down home prices would be to increase flat supply and cut loan-to-value ratios.

Instead of supplying 20,000 flats per year, he said the government should double the annual flat production to 40,000 or even 50,000 per year. "That will send out a strong message that there is a lot of supply in the pipeline."

Cusson Leung, an analyst at Swiss-based investment bank Credit Suisse, noted in his latest report that property prices would continue up in the medium term. Prices were driven by a combination of supply or demand imbalances and the expectation of such an imbalance would drive prices higher in the long term, he added.

"The supply and demand imbalance is not likely to change until 2015 and 2016. The government's measures are more about curbing expectations from snowballing and exaggerating the price movements, especially when inflationary expectations are skewed to the upside after the latest round of third-quarter [measures] from the US," he wrote.

However Alfred Lau, a property analyst at brokerage house Bocom International, believed tighter mortgage conditions would be effective in slowing price growth, and he expected a 5 per cent correction in property prices in the near term.

Yu Kam-hung, senior managing director at CB Richard Ellis valuation and advisory services for China, said the prolonged low interest rate environment would support prices but the government would have a lower tolerance on a further surge in home prices, and thus could add more cooling measures.

Stronger measures, such as increasing the special stamp duty level, introducing a profit gains' tax, or closing the loophole of using a holding company to buy a second home, might be considered, he said.

"Although the introduction of the stronger measures will affect end-user purchases, the policymakers will have to make a choice in order to prevent the market from overheating and potentially hurting the overall financial stability of Hong Kong," said Yu.