Property price: from soaring to shrinking

Warnings of housing bubble in HK by IMF

The Deputy Managing Director, Min Zhu, of the International Monetary Fund (IMF) has published an article named “Era of Benign Neglect of House Price Booms is Over”, justifying the alarming housing bubble developed around the world, with Hong Kong being specified. According to the Organization for Economic Cooperation and Development: Global Property Guide, 33 countries out of 52 have experienced an increase in housing prices until the fourth quarter in 2013. Hong Kong ranks the second highest in having a drastic rise of 10.25% in annual percentage change in the price of property, with the Philippines ranks the first with an increase of 10.56% whereas New Zealand ranks the third with an increase of 9.09%.

The insight of local economists

Local scholars and wealth management advisers share the same view as the IMF. Hong Kong SARS has imposed caps on loan-to-value and debt-to-income ratios since 1990s. However, none of these can impede the recent housing bubble in Hong Kong. With a mere relax on the double stamp duty not before long, the housing price escalated at once. The higher the housing price goes, the harder they plunge in the near future. Domestic economists expect a slight drop in the property price in the coming months but a dramatic decrease during 2015-2016, and a trough during 2017-2018.

Slumping price induced by external and internal factors

Various factors contribute to the expectation of slumping property prices. Government is determined to address the soaring property price. Tough property cooling measures like double stamp duty has deterred the rocketing housing price effectively. Second, the authority keeps increasing the supply of housing by raising land supply. Moreover, China is dedicated to fight corruption. Luxury consumption is hampered, thereby reducing the investment in property purchase within country and overseas. Lacking speculators in the property market, Hong Kong has valid reasons to undergo declining housing price. Besides, Hong Kong and the US will step into the interest rate rise cycle in the next half year. Increasing interest rates raises the cost of borrowing, thus it is very likely to drive the housing price downward.

Suggestions from domestic analysts

Some economists claimed that since the house price-to-income ratio has reached the peak in Hong Kong, the housing bubble is going to explode. They believed the property price may drop to the same low property price level in 2009; whereas some predicted the price could be as low as that in 1997. Therefore, the advisers suggested the investors should wait for the drop in property price while purchase. If so, the housing price could be largely reduced by 25% to 30%. In overall, analysts anticipate a larger decrease in the price of property which are remote and high-priced.

Warnings from the Financial Secretary

John Tsang Chun-wah, the Financial Secretary of Hong Kong, has been pessimistic about Hong Kong’s economy. With reference to this, in his newly published article, he suggested that there is a chance of lowering the expected economic growth for 2014 in his coming economic report in August. Riots in Iraq and Ukraine, hostility towards Mainland visitors and the poor performance in the retailing sector have long been his concerns. The World Bank also announced to lower the expected global economic growth to 2.8%. Having a dim prospect, the global housing market is under pressure. An array of property is left unsold.

Dilemma in Chinese economic reform

The Chinese government advocates an economic reform. For this, China’s property market is undergoing a dilemma. The authority proposes raising personal income; yet, the measure reduces corporate profits and their ability of debt repayment, arousing another predicament in China. On the other hand, if the government raises corporate profits instead of personal income, the household investment would be hindered, hurting the overall economy. Linking its economy with the China’s economy, Hong Kong should keep a close eye on its property market and stay alert of the incoming housing bubble.