Hong Kong home prices hit record, outlook cloudy pending rate rise

Hong Kong home prices surged to a record high this year, ignoring the government's introduction of tough measures designed to cool the red-hot property market, as the rally extended for a fifth straight year.

But there are a wide range of views about the likelihood of it lasting much longer, with interest rates likely to rise amid fierce market competition.

While some market watchers predict prices will fall by up to 10 per cent next year, others say they will level off or even rise by 10 per cent.

"The property bubble was already building up in Hong Kong, otherwise the government wouldn't have needed to roll out a slew of cooling measures to cap price growth [in November 2012]," said Eddie Hui Chi-man, a real estate professor at Polytechnic University.

He said that as interest rates headed for an upward trend, home prices in Hong Kong could drop by 3 to 5 per cent next year.

Alfred Lau, a property analyst at Bocom International, has downgraded the residential market outlook for the first time in three years, mainly due to the recent price overshoot and weaker rental outlook.

"We believe rental growth has been the strongest support to property prices in the past three years," Lau said. "However, with increasing property deliveries starting from the first half of next year and a weaker economic outlook, we expect rents to plateau going forward, and property prices may be at risk on the downside in the event of renewed rate rise fears or a further deterioration in the global economic outlook."

He said he was expecting a 10 per cent correction in property prices next year that could even blow out to 20 per cent if it coincided with the beginning of the rate increase cycle.

"The secondary market may face an even steeper correction," Lau said.

Centaline Property Agency said its latest Centa-City Leading Index, which tracks secondary home prices at 100 housing estates, eased 0.09 per cent week on week to 132.69 for the week to Wednesday after hitting a record of 132.81 the previous week. It has risen 14 per cent this year.

Thomas Lam, head of valuation and consultancy at Knight Frank, said luxury and mass residential prices would follow different patterns next year.

"With the implementation of double stamp duty, prices in the luxury residential market have experienced mild downward pressure this year and are expected to drop modestly, by less than 5 per cent in 2015, while mass residential prices could remain stable given strong demand for small and medium-sized flats," he said.

The affordability ratio - average mortgage payments as a percentage of average household incomes - was now around 60 per cent in Hong Kong, he said.

"If the mortgage rate is lifted by 200 basis points, the ratio will rise to more than 70 per cent, and if it's lifted by 300 basis points, the ratio will rise to 80 per cent," he said. "Therefore, we estimate that a mortgage-rate rise of less than 300 basis points will not have a significant impact on Hong Kong's residential market," he said.

Lam said future residential supply would mostly come from Yuen Long and Tseung Kwan O in the New Territories, followed by Kai Tak in Kowloon, while Hong Kong Island would have limited supply.

But property consultant JLL Hong Kong has a different take on the residential outlook, with its head of research Denis Ma saying home prices would remain flat next year or may even have some upside potential.

His optimism comes in the wake of market expectations of slower interest rate rises in the United States due to sliding oil prices. He said US interest rates could start to increase in the second half of next year instead of the first quarter.

"But the upside potential for price growth will be limited to about 5 per cent," Ma said.

Centaline Property Agency's Asia-Pacific chief executive, Addy Wong, said he expected residential prices would increase by 10 per cent in the first quarter of next year.

"The strong financial ability of locals and continuing trend of capital inflow into the city will spur property demand and drive up home prices next year," he said.

This year, home sales turned around in the second quarter when a proposed relaxation of the double stamp duty was announced in May.

"A marked increase in home transaction volume was observed in the second half of the year," said Alva To, managing director for Hong Kong and head of consulting for North Asia at property consultancy DTZ.

With developers rushing to launch new projects to tap the pent-up demand after the easing of curbs, the number of transactions rebounded 16 per cent to more than 60,000 at the end of last month, compared with just 51,770 for the whole of last year, according to Midland Realty.

Sammy Po, chief executive at Midland's residential department, said home buying interest would continue to be focused in the primary markets as developers' discount sales would lure potential buyers away from the secondary market.

He said he expected the number of transactions in the primary market this year would be more than 16,000 with total value climbing to a record HK$170 billion. "The number of transactions for new homes will continue to increase to 18,000 next year," Po said.