Dark clouds over Hong Kong's property market as 'perfect storm' looms

Interesting article in the South China Morning Post titled, "Dark clouds over Hong Kong's property market as 'perfect storm' looms."

It seems real estate prices and sales have fallen significantly since the Chinese government instituted measures last year to cool the real estate sector. So much so that analysts are expecting more gloom in the months ahead.

Overall property sales plunged to a 23-year low last year, a development that has fuelled fears Hong Kong will repeat the major downward trends the colony has experienced in the past.

What's evolving is seen as the perfect storm: government curbs that crimp demand at a time of increasing supply combined with an imminent interest rate rise that threatens to set off a severe price correction.

A collapse in demand that saw overall property sales plunge to a 23-year low of 70,501 deals last year has fuelled fears of a repetition of major downward trends of the past.

Amid the continuing slide, which began when the government imposed a hefty increase in stamp duty in February last year, gloom-and-doom forecasts of prices plunging as much as 35 per cent in two years have emerged.

"There are strong similarities with the 1997 bubble, but the exceptionally low level of interest rates has encouraged homebuyers to borrow more in this cycle than in 1997. So the market is far more dependent on inter-generational transfer of equity, low supply and low interest rates," said Andrew Lawrence, the managing director of real estate equities research at Malaysian investment bank CIMB Securities.

Before 2009, about 75 per cent of property transactions required a mortgage, Lawrence said, but following a drop in mortgage rates, now at a historical low of about 2.2 per cent, nearly every property transaction had been mortgage-funded.

One of the most bearish property analysts in the city, Lawrence said home values could fall more than 50 per cent in a worst-case scenario if the government did not relax the higher stamp duties. 

The real estate collapse in 1997 had no floor because it was driven by economic contraction, which created a downward spiral.

A repeat of that today would have stunning repercussions.

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