December 23, 2016 10:12 pm JST

No peak in sight for Hong Kong's home prices in 2017

Property analysts divided amid cooling measures, rising US interest rates

JENNIFER LO, Nikkei staff writer

HONG KONG -- It is a time of the year when property analysts gaze into their crystal balls. However, views diverge widely as to where home prices in Hong Kong are headed in 2017, with cooling measures in place and as a steeper U.S. interest rate cycle looms.

Property agents are generally upbeat on the market. International groups like JLL and Savills forecast home prices in the territory to rise up to 5% next year, while DTZ/Cushman & Wakefield expects property values to grow 5-10% in the first half of the year. "Home prices in Hong Kong are not going to peak," said Alva To, DTZ/Cushman & Wakefield senior managing director in Hong Kong, citing pent-up demand that far surpassed supply.

Monthly home transactions in the last five years contracted to 5,000 units on average, just half the level in 2007-2011, as factors including skyrocketing prices and previous rounds of cooling measures had discouraged homebuyers. "Once that demand is released, it'll be strong enough to buoy the market again," To said, adding that prices next year could climb above the 2015 peak.

Housing prices in Hong Kong have increased 1.5 times since the global financial crisis, reaching their last peak in September last year, before receding somewhat. A rebound in prices starting in April this year nearly erased all losses in the preceding months, partly helped by the influx of mainland capital to hedge against a weaker Chinese yuan.

Local agents like Midland Realty, Hong Kong Properties and Ricacorp Properties expect home prices will rise 5% overall in 2017 after a slow start. Their relatively bullish views are generally supported by two factors.

First is a muted impact from the U.S. interest rate rises in a low rate environment. Because Hong Kong's currency is pegged to the U.S. dollar, a rate increase by the U.S. Federal Reserve could translate into higher mortgage costs. "This is by far our biggest concern," said Willy Liu, Chief Executive of Ricacorp. "But, assuming three hikes with 25 basis points each, the federal fund rates would rise by less than 1%, which is a modest increase."

Second is the impact of a change in Hong Kong's leadership, with the election for the territory's chief executive to be held in March. Observers expect that the next leader will not be rolling out drastic new measures immediately and existing cooling policies for the housing market will remain intact. In November, the current government raised stamp duty to 15% on home purchases, the first increase in three years.

Notes of caution

But local property agents remain largely cautious about expanding their operations. With nearly 2,400 employees, Hong Kong-based Ricacorp will hire 300 more staff next year, down from its initial target of an increase of 500 people. The number of new branches will also be halved to 10, bringing the total to 200.

Others prioritize recruitment over opening new outlets due to higher rental costs and expected new launches by developers like Cheung Kong Property Holdings and Sun Hung Kai Properties after the Chinese New Year in late January.

Centaline is looking to add 300 workers next year. Midland will hire 600-800 employees and open the bulk of its new branches near new luxury projects to target homebuyers. "We'd rather not be restricted by our target but to stay flexible," said Sammy Po, head of Midland's residential department.

Major investment banks have more dim views on the market. Deutsche Bank and CLSA expect home prices to fall between 5-11% next year. Goldman Sachs and Credit Suisse predict prices will slump between 15-22% by the end of 2018. Macquarie is the exception, expecting stabilization from the third quarter, bringing a 5% increase in prices over the year.

Karl Choi, a property analyst at Bank of America Merrill Lynch, noted that home prices in Hong Kong would fall 20% in the next three years after reaching a "cyclical peak". While some developers are already handing out fatter incentives to buyers in a bid to offset the extra stamp duty, Choi said they could not be too aggressive in their pricing amid fears that would put off buyers.

Among the bears, Citi has the most pessimistic forecast of a 15% price correction in 2017. The bank's economist Adrienne Lui said the cooling measures would dampen the market and more than halve home transactions, to reach new lows of 3,000 a month. This might not be the most welcome holiday news for investors, but Citi's bullish year-end prediction for 2016 turned out to be the most accurate as most of its peers were taking opposite bets.

Asia300

Cheung Kong Property Holdings Ltd.

Hong Kong

Market(Ticker): HKG(1113)
Sector:
Industry:
Finance
Real Estate Development
Market cap(USD): 26,936.6M
Shares: 3,755.03M
Asia300

Sun Hung Kai Properties Ltd.

Hong Kong

Market(Ticker): HKG(16)
Sector:
Industry:
Finance
Real Estate Development
Market cap(USD): 43,441.4M
Shares: 2,895.59M

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