Prepare for the chill as property market gets ready to hibernate

September 23, 2015 13:21
Is Hong Kong's burgeoning home market about to peak? Photo: Bloomberg

Secretary for Development Paul Chan Mo-po devoted a post on his official blog to the property market with a stern warning to homebuyers that the market may be near an inflection point.

In recent decades, Hong Kong’s property market has remained brisk most of the time, outshining those elsewhere, as a result of the government’s rationing of land and a humming economy.

Prices of plots and homes in the city have been on a seemingly neverending rise, so much so that homebuyers can simply sit back and watch the value of their properties soar.

Owning a home has become equivalent to rolling in dough.

Fat revenues from land sales and related taxes have been a pillar of the government's funding, which has helped Hong Kong keep its low-tax regime and attract substantial investment inflows.

In the early days of the Hong Kong Economic Journal, the newspaper argued strongly against early home ownership by young people, since servicing a mortgage for years would fetter their career development and deter them from changing jobs or starting their own business.

This advice, totally unsolicited, largely fell on deaf ears, as who could resist the temptation of hefty, easy returns from speculation in property?

Developers were unhappy, threatening to withdraw their advertisements if the newspaper continued to badmouth the market.

But today, I still stand by the newspaper’s view: if you are young, don’t rush to buy a home.

In his column, Chan quoted many figures to highlight the uncertainties arising from a spike in housing supply and global economic headwinds.

In a nutshell, the development chief's “gentle reminder” is a plain home truth: as the good days may be over, never overstretch yourself.

So what lies ahead?

Since the government no longer sees property developers as a mainstay of the local economy, it won’t succumb to their pressure or moaning.

Following the sharp gains in home prices in the near-zero interest rate environment in recent years, the housing market is likely to have peaked or will peak soon.

The economy will take a beating should home prices tumble, and the resulting tepid demand will drag down prices further.

Many property owners may sink into the dire straits of negative equity.

In such a scenario, a negative “wealth effect” will damp consumer spending.

I hope the government can be more restrained with its policies, as perhaps everyone will have to pay if there is a meltdown in the property market.

The city’s commercial properties face a looming slump, as well, especially malls and shopping arcades in peripheral locations.

Hong Kong is still a laggard in e-commerce, but once the industry gains more momentum, doomsday for subprime commercial properties and landlords may not be far away.

Another threat is the stronger local currency, which has already been driving visitors away.

Some people try to link the spreading retail chill and increase in vacant shop spaces in major commercial precincts to protests and hostile rhetoric against mainland Chinese, but their claims are largely unfounded.

The decline is more associated with shifts in currency rates.

Shoppers from the mainland, shrewd as they are, will surely flock to Japan and Europe, where prices are more attractive when converted to renminbi.

Just as with the print media, some secondary commercial property developers and operators will unavoidably be driven out of business.

But just as many prestigious publishers continue to flourish, landmark malls will continue to shine.

This article appeared in the Hong Kong Economic Journal on Sept. 16.

Translation by Frank Chen

[Chinese version 中文版]

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A famous Hong Kong writer; founder of the Hong Kong Economic Journal