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Can Hong Kongs Property Market Weather The Storm

News Posted On: 13 October 2014

Hong Kong’s residential property market has risen for the last four years, becoming a byword for market overheat – and for housing unaffordability. But it’s now threatened by a severe price correction. A combination of a surge in new supply, cooling measures instituted by the island’s government and an imminent interest rate rise has generated what finance secretary John Tsang Chun-Wah calls ‘a perfect storm.’

Right now, the storm hasn’t broken. Residential property prices in Hong Kong are still climbing. But market health is a matter of what you’re used to. House prices rose 4.28% year on year in July 2014 – which sounds like a rate some countries would kill for. But those countries didn’t see prices rise 18.92% year on year in July 2013.

Hong Kong has political problems too, and they’re not unrelated to the housing market. Hong Kong’s electoral reform protesters under the Occupy Central banner are in the streets in force, garnering the title ‘umbrella revolution’ and focussing on democracy demands.

What isn’t apparent until you look behind the umbrella is that for many of those in Hong Kong’s squares and streets, the protests are ‘about inequality, not politics,’ as venture capitalist Eric Li says in the Washington Post. Hong Kong’s economy is changing. It used to be China’s major port, and had a strong manufacturing base. Now the manufacturing has moved, the port has lost relevance and the economy is dominated by finance, leaving many short of work and median incomes falling amidst what was until recently one of the world’s hottest property markets.

One reason a correction seems so likely is that disconnect between Hong Kong’s real economy and its property market: the economy is slowing, expanding by only 1.8% year-on-year in September this year.

Again: these are problems Portugal, Greece or Spain might be eyeing enviously, but they could be ruinous for Hong Kong down the line. The current elevated price is largely due to international money seeking a refuge from developed economies in the wake of the Lehman Brothers collapse and the financial crisis that followed it.

While prices fell hard across Europe and the USA, they rose sharply in Hong Kong – 28.5% in 2009, 21% in 2010, 25% in 2012. ‘The question,’ says Barclays property analyst Paul Louie, ‘is, “can we maintain this type of volume for the next two years?” We still think home prices are very unaffordable in Hong Kong and we continue to look for a 30% correct[ion] by 2015.’

Jason Ching, property analyst with Deutsche Bank, adds: ‘once the pent-up demand gets exhausted, things should return to normal because the economy is an issue, new supply is on the rise and the [interest] rate hike is coming closer.’

There’s also the issue of government regulations introduced to combat real estate speculation. These include a so-called ‘flip tax,’ of 15%, introduced in 2010 and aimed at penalizing flipping along with doubled stamp duty on properties over HK$20m (US$2.6m/£1.56m) and a 15% Buyer’s Stamp Duty on properties purchased by foreigners. It wasn’t enough to assuage the concerns of the umbrella revolutionists: will it be enough to avert the perfect storm?

Written by Les Calvert of www.property-abroad.com - overseas property reporter

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