SHKF: The paradox of Hong Kong Property Market
December 16, 2010 - Hong Kong
The Hong Kong property market seems to have stabilised lately by the aggressive government actions. The raised in stamp tax and increased in minimum down payment will drive up the transaction costs for any short term speculations, and the suspension in property investment in the CIES program will reduce foreign demand. Furthermore, the government increases the amount of land sale in the view of increasing the supply level. However, there are three factors that have limited the government's ability to control the rising house prices.
Firstly, the demand from Mainland Chinese buyers is unlikely to be affected by the property suspension in the CIES program. According to the Land Registry records, it shows that in H1 2010, mainland Chinese buyers accounted for at least 35% of the new flats sold more than HK$12 million, up from 22.6% in H2 2009. Even at the lower end of the market, mainland Chinese buyers accounted for 13%. Many Mainland Chinese buyers are buying Hong Kong property not because of the residency or investment potential. They like Hong Kong property because of its location, quality of life and governance. Since they are mostly cash buyers, they are unlikely to be deterred by the raising deposit required and the stamp tax.
Secondly, the historical low interest rate has made the cost of borrowing most affordable in centuries. As a result of the monetary expansion in the US, the Hong Kong dollar monetary base has tripled over the past two years and there is abundant liquidity in the financial system. Interbank rates remain close to zero and real interest rates are negative and falling. The low borrowing cost has helped the overall affordability to support the current property market from collapsing like the Asian Financial crisis as ratio between property value versus income had already exceed the 1997 level. There should not be any problem on the affordability until the interest rate rising cycle begins. However, since our monetary policy is very much linked to the US and the US economy is unlikely to raise interest rate soon, the risk of a property bubble seems very remote.
Third, long term supply remains a question mark on government policy. The shortage of flats was clearly a ripple effect from the tech bubble and SARS which the government had cut down the supply of flats in order to boost asset pricings. And the situation is unlikely to improve in short term as any increase in supply will not reflect until 5 years time. Hence the real demand will remain strong.
Many analysts believe that the money will go to the commercial property market instead. However, we believe that liquidity will flow to property stocks instead as the fundamentals remains favorable on property pricings due to the above 3 reasons. Together with the CIES program favoring towards equities and mutual funds, to benefit from the rising property market without subject to too much tax, the equity and mutual fund market seem the better choice.
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Source: Sun Hung Kai Financial
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