Prices of second-hand homes tumbled recently to a two-month low, dominating the newspaper headlines.
Market expectations have reversed, and some even predict a price slide of 30-70 percent in future.
I noted early this year that home prices would level off in the third or fourth quarter.
The 10-week moving ratio — which compares housing prices in the 118 main housing estates in Hong Kong to their 10-week average — has started to weaken after hitting a peak of 90 percent (that is, prices in 90 percent of the estates were higher than their 10-week average) on July 6 last year.
Meanwhile, prices in the secondary market have been diverging from that index for as long as 15 months.
Prices of second-hand homes have kept rising while the ratio headed south and touched a bottom of 30.5 percent in early October, the lowest in 21 months.
That means only 36 housing estates reported higher prices than their 10-week average, almost 70 fewer than in July last year.
Also, the three-month advance/decline (A/D) index hit a two-year high of 31 in early March, which means prices rose over three months in 31 housing estates, after subtracting the number of estates where prices fell in the same period.
However, the A/D index has started to ease and to diverge from the housing prices.
The index even dropped to 2 on Oct. 11, the lowest in 17 months.
The A/D index has on occasion tumbled below zero or even below -10 since 2003.
That was followed by a deep correction in the secondary market in 2007 and long-lasting corrections in 2011 and 2013.
The new-high ratio, which measures the proportion of the estates where prices hit a 52-week high, reached 4.5 percent on Oct. 11.
The new-low ratio, which measures the proportion of the estates where prices hit a 52-week low, reached 15.4 percent.
The net index, obtained by subtracting the new-low ratio from the new-high ratio, falls into negative territory in a downturn, and vice versa.
This net index has kept falling since 2003, which shows the secondary market has been losing upward momentum despite rising prices.
And the gauge started to really tumble since the second quarter of this year while the overall housing index kept hitting new highs.
The net ratio usually falls below zero as the housing market loses price momentum.
The market correction may continue until the net index drops below zero.
We foresee a correction that could last until the third quarter of next year, with an average drop of 10 percent in prices.
This article appeared in the Hong Kong Economic Journal on Oct. 22.
Translation by Julie Zhu
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