Shares in HK developers give hope to homeowners

HONG KONG — Hong Kong homeowners could be forgiven for fearing the worst. In a city notorious for its real estate booms and busts — including a 70 per cent tumble triggered by Asia’s financial crisis in the late 1990s — property prices are once again sliding from all-time highs.

Yet there is little reason to worry that the latest slump will spiral into another crash, if shares of Hong Kong’s biggest developers are anything to go by. After a 34 per cent selloff from its June peak through Jan 21, the Hang Seng Properties Index has jumped 18 per cent in just two months — outpacing the broader Hong Kong equity market by almost 7 percentage points.

The last time the property stock gauge reversed a drop of similar magnitude, in October 2011, home prices began climbing three months later. The index has been a decent leading indicator over the long term, too, foreshadowing turning points in the housing market 70 per cent of the time since 1994, according to data compiled by Bloomberg. While that is not a perfect track record, it does bolster the case of optimists who say the current slide in property values is just a temporary correction.

“A price recovery in the physical market is very likely,” said Mr Wee Liat Lee, an analyst at BNP Paribas SA in Hong Kong, who predicts home prices will bottom out by year-end and resume annual gains of about 10 per cent through 2019. “The reason why share prices are able to lead is because fund managers do a thorough analysis of the physical market condition and predict it will turn,” said Mr Wee.

Volumes Rebound

Analysts point to several reasons why a crash is unlikely. For one, sales volumes are starting to recover as prices drop to levels that entice buyers. After falling to the lowest level in at least 14 years in mid-February, secondary transactions in major housing estates rebounded five-fold to a nine-month high in the week ended March 13, according to Midland Realty.

The market is thawing as fears over an exodus from Hong Kong assets fade. The city’s dollar has rebounded from the weak end of its trading range against the US currency, reaching the strongest level in two months on Monday, while interbank borrowing costs have tumbled from five-year highs as investors scale back bets on higher US interest rates and an economic hard landing in China.

Stocks Rally

Hong Kong could reconsider some of its property curbs if prices fall too far, said Mr Cusson Leung, the head of Hong Kong research, conglomerates and property at JPMorgan Chase & Co. Over the past six years, authorities have increased the minimum down payment requirement on mortgages, lifted taxes on non-resident home-buyers and introduced a special stamp duty for purchasers who flip properties within 36 months.

Mr Leung sees home prices dropping another 10 per cent in 2016 to levels that would make government easing more likely.

Priciest Market

Of course, the stock market does sometimes diverge from the physical property market, and Hong Kong faces multiple headwinds — including shrinking retail sales — that could translate into lower demand for real estate over the long term.

There is also the problem of affordability. Hong Kong was ranked as the most expensive housing market among 87 major metropolitan areas as of the third quarter of 2015, according to a Demographia survey, after home values surged more than 360 per cent from a 2003 nadir through mid-September. BLOOMBERG