Barclays Plc joined UBS AG (UBSN) and Bank of America Corp. in forecasting a Hong Kong property slump, predicting home prices will fall at least 30 percent by the end of 2015 as income growth stalls and supply increases.
A “downward spiral of home prices is likely” as developers and homeowners adjust expectations, analysts Paul Louie and Zita Qin wrote in a report today. They assigned a “negative” rating to the Hong Kong property sector and said office prices will drop 20 percent.
Barclays’s forecast exceeds the predictions of a series of brokerages that have downgraded Hong Kong property this month and implies the biggest plunge in prices since 1998. Hong Kong home prices more than doubled since the start of 2009 on record-low interest rates and lack of supply, prompting the government to impose extra taxes and tighten lending restrictions.
“The magnitude of the fall is underestimated,” the Barclays analysts wrote.
The analysts are advising investors to sell eight of the 14 Hong Kong property companies they cover, including Sun Hung Kai Properties Ltd. (16), the city’s second-biggest builder, Swire Properties Ltd., New World Development Ltd. and Wharf Holdings Ltd.
Cheung Kong Holdings Ltd. (1), controlled by Li Ka-shing, Asia’s richest man, and Hang Lung Properties Ltd., which made more than 50 percent of its revenue outside Hong Kong in the first half, are the only two property stocks Barclays recommends investors buy.
The Hang Seng Property Index, which tracks nine of the biggest developers listed in the city, including Sun Hung Kai and Cheung Kong, has declined about 13 percent since peaking in January. It rose 0.8 percent at the close of trading in Hong Kong today.
“For prices to drop that much, you’ll need to have many bad things happening at the same time,” said Wong Leung-sing, a research director at realtor Centaline Property Agency Ltd., referring to Barclays’s forecast. “Judging from buyers’ reaction to the new projects this month, we haven’t seen that kind of sentiment.”
A new project developed by New World and Wheelock & Co. in the Kowloon West area, on Oct. 26 sold all 185 units within seven hours after they were put on the market, Sing Tao Daily reported yesterday, citing the developers. The units were sold at average prices of HK$22,000 ($2,837) to HK$24,000 per square foot, the report said.
New World is still seeing “strong demand” from homebuyers and has no plans to cut prices at its projects significantly this year, Executive Director Adrian Cheng said in an interview on Oct. 21.
Buyers from mainland China, which accounted for as much as a quarter of home sales in Hong Kong at the peak in the fourth quarter of 2011, fell to 8 percent in the second quarter this year, according to Centaline. Hong Kong imposed an extra tax on home purchases by companies and non-residents in October 2012.
Developers in the first half sold 4,300 residential units, the fewest since the second half of 2008, after the government in February doubled stamp duty taxes on property transactions over HK$2 million.
To make up for the first half’s slowing sales, developers will need to cut prices to attract buyers, according to the Barclays analysts.
Prices will come under pressure as household incomes and residential rents peak, while housing supply is set to increase, the analysts said. Hong Kong’s average household income was little changed in the second quarter, while rents are “starting to hit the income ceiling,” they said.
Chief ExecutiveLeung Chun-ying, who has pledged to increase land supply since coming to office in July 2012, said in January the private sector may sell 67,000 homes in the next three to four years. Hong Kong developers completed 48,936 homes from 2008 to 2013, the lowest in any five-year period since data became available in 1985.
Hong Kong home prices last year surpassed a previous peak in 1997 and are now the world’s highest, according to realtor Savills Plc, after having more than doubled since 2009. They have fallen about 2.7 percent since rising to a record in March, according to an index compiled by Centaline, the city’s biggest realtor by the number of agent.
The city’s last major home-price crash started in October 1997 and lasted six years. Prices fell almost 50 percent in the next 12 months after former Chief Executive Tung Chee-hwa announced plans to add as many as 85,000 housing units in response to a doubling of real estate prices over the previous two years, and as the Asian financial crisis dampened confidence. They declined more than 60 percent to a trough in 2003 and have more than tripled since then.
Raymond Ngai of Bank of America’s Merrill Lynch unit and UBS’s Eva Lee are among analysts who over the past month have forecast home prices in the city will drop as much as 25 percent as demand wanes because of government curbs and the expectation of rising interest rates.
Since 2010, Hong Kong has introduced a raft of measures, including extra property transaction taxes and tighter mortgage-lending requirements, to damp prices and avert a housing bubble. Total residential transactions in the first half fell to the lowest since 1996, according to data available on the Land Registry’s website.