Weekend Property

Wave of new homes: will the imminent increase in housing supply trigger further price falls?

Even though the number of new private homes entering the market is set to reach a high, one expert is predicting that residential property prices will generally remain stable – unless the economy takes an unexpected dip

PUBLISHED : Friday, 12 August, 2016, 1:04pm
UPDATED : Friday, 12 August, 2016, 3:29pm

A wave of new homes is about to hit Hong Kong’s property market in the medium to long term. But will this trigger further price falls in the already depressed real estate sector? One market observer says not in the short term.

Centaline Property Agency estimates that private housing supply will reach a peak at 93,000 units in the coming three to four years. However, estate agents say construction will slow down in the near future as potential supply from sites that have not yet started work in the second quarter fell to about 22,000 units from the peak of about 28,000 units in the final quarter of last year.

Nonetheless, even if the property sector is flooded with new supply, overall home prices will remain stable, at least in the second half of the year, unless the economy is hit by unexpected factors, says Cusson Leung, head of Asia, ex-Japan, property and conglomerates research and head of Hong Kong research at investment bank J.P. Morgan.

“Despite some lingering uncertainty, Hong Kong’s economy has remained stable with low [unemployment]. We are also past the worries about the Fed Reserve’s rate increases following [Britain’s decision to leave the European Union]. Both factors should continue to underpin property prices in the few months ahead,” Leung says.

However, there are signs that the Fed may raise interest rates this year, following July’s impressive US jobs report. Some 255,000 jobs were added in July, while the June figures were 292,000.

While potential interest rates may rise this year, Hongkongers took tiny steps back into the property market. In the second quarter, secondary home prices rebounded, albeit modestly, by 1.6 per cent from the preceding quarter, according to the pricing index compiled by the Rating and Valuation Department.

When prices show signs of softening, a couple of heavily discounted deals, sometimes magnified by the media, could easily send market sentiment from being bullish to being bearish
Lawrance Wong, president, Many Wells Property Agent

Leung says the price rebound was primarily driven by improved market sentiment.

“Developers will continue to leverage the favourable market sentiment in marketing new projects. They are not desperate and therefore not quite willing to slash prices just yet,” he says. “While they would continue to adopt a low-price strategy, they would nudge up prices batch by batch in an effort to keep the momentum going without provoking a backlash from potential buyers.”

Yet, in the second quarter, about 42 per cent of the completed units have not been sold, Centaline estimates, adding that a total of 17,199 housing units will be completed by the end of this year. Last year, a total of 11,280 units were built.

As inventory continues to build up, Leung believes developers might slow down developing land in the medium term after a flurry of activity over the past few years.

Lawrance Wong, meanwhile, president of Many Wells Property Agent, a mid-sized agency chain with a strong presence in the northwestern New Territories, says primary and secondary markets do not necessarily compete against each other.

“It all boils down to market sentiment. Sometimes sales of new homes may undercut the secondary market, but there are also situations [when] both markets are buoyed by strong sentiment,” he says.

“When prices show signs of softening, a couple of heavily discounted deals, sometimes magnified by the media, could easily send market sentiment from being bullish to being bearish,” Wong says.

Meanwhile, Vincent Chan, managing director for Hong Kong at estate agent, says he is concerned about developers offering mortgage loans. A number of developers have offered buyers sweeteners, including mortgage plans that appear to be better than what banks offer.

“I don’t think this phenomenon [developers lending money to homebuyers] is healthy. Developers are playing the role of banks ... This practice, though perfectly legal, is more or less a drag on their operating cash flow, hindering them from buying sites or investing in their core business,” Chan says.