The UBS Global Real Estate Bubble Index shows homes in most international metropolises are overvalued.
Among them, London and Hong Kong face bubble risks.
In Asia, the Swiss bank is bearish on Singapore and Hong Kong.
Home prices in Singapore have been decreasing for some time.
A further decline may lead to reasonable valuations.
Homes in Tokyo are slightly overvalued, but have yet to enter the bubble stage.
In mainland China, home prices will diverge greatly from city to city.
There are two indexes frequently used to evaluate investments in residential property: the ratio of the home price to household income, and the ratio of the home price to the rent payable.
The former represents the lack of affordability of the home to a household wishing to buy it, and the latter reflects the cost to the owner of the cash flow generated from the property asset.
On both these indicators, Hong Kong ranked top among Asian markets, followed by Singapore.
So, we think the two cities’ home prices face downward pressure.
They are highly sensitive to interest rate increases and demand from foreign markets.
We expect that there is still room for home prices to decrease next year in Hong Kong and Singapore.
Hong Kong’s home prices reached record highs this year.
We project them to fall 10 percent next year and commercial property prices to decrease 5 percent.
Negative factors include China’s regulatory efforts to reduce capital outflows, a weak local credit cycle, and decreasing interest from foreign investors arising from the imminent interest rate hike in the United States.
We will continue to see divergence in the mainland’s property markets.
High inventory still exists in third- and fourth-tier cities.
The outlook for top- and second-tier cities is far more positive.
Overall, land sales in the mainland may continue to be weak.
New construction investment will fall 5-10 percent next year.
However, that will still be better than the 12 percent decline in the first nine months of this year.
Loose monetary policy and other measures will boost home sales, reduce inventory and assist Chinese developers in issuing their corporate bonds in overseas markets.
This year, China’s loose monetary policy has improved the financial capability of bond issuers.
Increased liquidity and lowered thresholds in the domestic bond market decreased issuers’ borrowing costs and refinancing risks.
The capital cost to Chinese developers of issuing bonds in the domestic market has fallen to 4-5 percent from 5-8 percent before the central bank cut the benchmark interest rate.
We expect the firms to continue optimizing their balance sheets.
Chinese high-yield bond issuers will focus on redeeming their costly offshore bonds or try to extend their maturities.
The government’s policies to encourage home ownership will boost new home sales next year.
This article appeared in the Hong Kong Economic Journal on Dec. 9.
Translation by Myssie You
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