The property market is likely to level off in the last quarter of the year or the first quarter of 2016 as the US dollar continues to strengthen and panic buying subsides.
Impulse buying of so-called “starter homes” has been making headlines after reports that the new subsidized housing scheme has received more than 40,000 applications.
However, the boom not seen since the 2008-2009 financial crisis may be about to end.
The greenback has been on the rise since the third quarter last year. The US Dollar Index, which measures the greenback against a basket of six major currencies, has gained more than 15 percent in the six months from July last year.
The index is up more than 2 percent this year.
The housing price bubble may slow — even reverse course — later this year or early 2016 given the negative correlation between the US dollar and property prices.
Meanwhile, the price divergence between starter homes or small and medium-sized flats and blue-chip property offers some hint of things to come.
Money has been flooding into starter homes since 2012 after the government released a series of counter-cycle curbs which have dampened market demand.
As a result, smaller flats with saleable area below 70 square meters have outperformed larger flats.
For example, property prices in the New Territories, which mainly offer starter homes, have soared more than 140 percent since the 2009 financial crisis, 10 percentage points above the average property price rally during the period.
However, smaller flats actually have been in line with the overall market if we narrow down the time frame.
Bigger flats with saleable area above 100 square meters have lagged behind smaller ones in terms of price increase.
In some cases, the difference is more than 40 percent.
However, there is always a price premium between blue-chip property developments such as Taikoo Shing and New Territories properties.
The historical premium between Taikoo Shing and City One Sha Tin has stayed around 30 percent to 86 percent since 1994.
Nevertheless, the price premium has been narrowing as prices of smaller flats have soared at a much faster pace than those of blue-chip property.
For example, the premium between Taikoo Shing and City One Sha Tin has fallen to 32 percent, close to the bottom, and the price premium has also decreased with other starter residential estates such as Tai Po Center and Sha Tin Center.
Investors should pay attention to other factors. It remains unclear if the US Federal Reserve will hike interest rates as expected.
If the Fed delays the rate hike or launches another round of quantitative easing, the property price rally will take longer to dissipate.
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