Warning bell for the end of Hong Kong's 12-year property rally is ringing louder

The warning bell signalling the end of Hong Kong's 12-year property rally is ringing louder with more experts predicting that the stock market rout and economic uncertainties at home and abroad will accelerate a price correction.

Analysts widely expect home prices could fall as much as 10 per cent this year. Hong Kong home prices have risen 9.8 per cent since January after soaring more than 360 per cent from 2003.

"The worrying factor is Hong Kong's economy, especially the retail market. Some retailers will be forced to close their business or cut staff if the coming Christmas holidays fail to lift sales. It will certainly affect the home buying desire," said Alvin Cheung Chi-wai, an associate director at Prudential Brokerage.

He notes the increasing number of transactions recently sold for below market price in the secondary residential market.

"It is a reverse trend. Previously, flats in the secondary market kept setting records. Today, vendors have to lower their asking prices on rising expectations home prices are going to fall," said Cheung, who expects home prices could decline 10 per cent next year.

His forecast comes in the wake of JP Morgan predicting flat values could drop 5 to 10 per cent a year over the next three years.

The number of flats in the secondary residential market changing hands at steeper discounts is also on the rise. Such cases were seen from blue-chip housing estates in Taikoo Shing to mass-market homes in Castle Peak Road in the New Territories.

One case in point was a 714 sq ft unit in Taikoo Shing - the most actively traded housing estate in Quarry Bay - which sold on Sunday for HK$12 million, or HK$16,807 per square foot, 6 per cent below prevailing transaction prices, agents said.

A 572 sq ft unit at Belvedere Garden in Castle Peak Road sold for HK$4.98 million, or HK$8,706 per square foot, according to Louie Lui, a senior manager at Centaline's Belvedere Garden branch.

"It is the lowest price in terms of per square foot in the past 12 months," he said.

Buying sentiment may further be hit after UBS lowered its year-end target for the stock market's Hang Seng Index to 19,775 points. The blue-chip index closed 3.28 per cent higher at 21,259.04 points yesterday.

"Now, as we have seen a combination of the three pillars of Hong Kong's economy weakening (tourism and re-export) or showing signs of weakness (property), along with decelerating economic growth in China, we believe our 'black-sky' scenario could be a better portrayal of the challenges in the current environment," UBS said.

Eva Lee, a property analyst with UBS, said stock market turbulence would certainly affect buying confidence.

"But it is not a key factor to trigger a price correction. The property market outlook still hinges on the performance of our economy," she said. The brokerage house forecasts home values will fall 5 to 10 per cent this year.

Morgan Stanley said home prices would decline 5 per cent from the current level to the end of this year and remain flat next year.

Joseph Tsang, the managing director of property consultancy JLL's Hong Kong office, believes the worst-case scenario for the mass-market home sector would be a decline of 5 per cent next year because demand remains solid.

"Development cost for mass residential projects is HK$12,000 to HK$13,000 per square foot. I believe downside risk for unit pricing not exceeding HK$15,000 per square foot will be limited," he said.

On September 5, Kowloon Development's special financing scheme helped to boost the sale of its Upper East development in Hung Hom. It sold 328 units or 89 per cent of the total over the weekend.

The developer launched the first batch of 368 flats at prices as low as HK$3 million. Buyers will only require as little as a 5 per cent deposit through its scheme of providing second mortgages of up to 35 per cent on top of the bank's 60 per cent.

Tsang said the luxury residential sector, particularly for flats worth HK$20 million to HK$100 million, could have room for a 10 per cent downward adjustment once interest rates rose.

He said individual owners offering flats at discounts had not developed into a trend.

"There are always some owners who offload their flats at low prices for some personal reasons. But most vendors still have strong holding power and refuse to sell at a low price," he said.