Market divided over Hong Kong's housing prospects

Cheung Kong (Holdings) executive director Justin Chiu Kwok-hung stirred up quite a debate earlier this month when he said the worst was over for the city' s housing sector and the market had overreacted to the impact of US tapering.

While Chiu is far from being the only bull on the city's housing market, a number of observers hold the opposite view.

CLSA's regional head of property research, Nicole Wong, expects price falls of 10 per cent this year, adding that any developer declaring the worst is over is "not honest", while Paul Louie, the head of regional property research at Barclays, said home prices would fall by at least 30 per cent by the end of next year.

However, Chiu's comments found support from Alfred Lau, an analyst at Bocom International.

"The worst is over for the housing sector, judged by the positive sales results of new launches recently," Lau said.

When Sun Hung Kai Properties sold the remaining flats at The Cullinan at Kowloon Station in October, the developer offered discounts of more than 20 per cent and reaped good sales, Lau said.

Developers had offered smaller discounts in new launches recently, but sales were still not bad, he said.

Lau said concerns about a property price correction were being driven by the prospects of an interest rate increase and an increase in housing supply.

"We believe the market might have been overly cautious," he said.

While supply is a key factor for home prices, Lau said the government faced a challenging task in maintaining its 20,000-unit annual supply target in the private sector, given the difficulties in building up land reserves and the government's intention to shift resources to public housing.

Land sales have decreased from two years ago, with land sales last year sufficient for slightly below 8,000 units, and the land supply target for the 2013-2014 fiscal year would largely depend on the successful sale of land at Tai Wai Station (2,900 units) and Lohas Park Package 4 (1,900 units), he said.

"If the government fails to meet such a supply target for a second year, it will eventually reduce future housing supply and reduce the developers' incentive to rush through property sales," said Lau, who predicts home prices will remain at their current level until 2017.

One key factor behind analysts' varying opinions is whether or not they believe Leung Chun-ying's administration can substantially boost the supply of flats hitting the market. That would affect developers' pricing and sales strategies and would be likely to trigger a downward spiral of home prices.

Wong said she believed the supply of flats would increase this year.

The number of new flats for sale could increase 85 per cent year on year to 24,015, up from 13,000 last year, she said.

"So it is very likely developers' price cuts will go deeper and deeper as the year goes by, so as to clear inventory," Wong said.

Developers would want to clear inventory because land supply would increase and land prices would fall.

"The Leung Chun-ying administration is keen to increase land and flat supply," Wong said. "As long as the government cuts land prices, developers will come to buy.

"We believe the residential price correction will accelerate/deepen this year because the primary market started to see deep cuts only in November last year and the ripple effect has yet to be felt."

She said demand was expected to drop as prices fell.

"The situation is just like 1998. When prices started falling, buyers rushed in immediately. But buyers stayed away when prices continued to fall," Wong said. That saw home prices fall over 60 per cent from their 1997 peak.

"Any developer who makes such a comment [about the worst being over] is not honest," Wong said.

CLSA expects prices will fall 10 per cent this year.

Louie also takes a bearish view. In October, Barclays issued a report predicting that the Hong Kong property market was about to enter a downturn, with prices expected to drop at least 30 per cent by the end of 2015.

"We have not changed our view," Louie said. "Affordability in Hong Kong is stretched."

Ten years of rising prices since the housing market bottomed-out in 2003 had seen the price-to-income multiple for Hong Kong homes rise from 5.5 times to 13.3 times. "It is even higher than in 1997 (13.2 times)," Louie said.

He said US tapering would affect the Hong Kong property sector through tightened liquidity and yield compression.

Joseph Tsang, managing director of property consultants Jones Lang LaSalle Hong Kong, said: "The worst will not be over until sales volume recovers in the secondary market."

But secondary market sales would not pick up until government removed the curbs it had imposed, and that was unlikely in the foreseeable future, he added.