HK's Unholy Trinity: Manipulation?

GREASING THE SKIDS...


An "unholy*" trinity is working together to Manipulate the property market lower


+ THE BANKS with lower valuations (without transactions to back up those lower levels)

+ PROPERTY AGENTS with advice to secondhand sellers to "try lower"

+ THE MEDIA with purposefully exaggerated reports of price cuts


THEIR OBJECTIVE: to cut Hong Kong property prices (in the secondary market).

And they may succeed, just as they did in late 2008.


Now helping them, is a new factor - FORECLOSURES :

+ Mostly on very expensive flats bought by now "stressed" mainland China buyers

+ Banks who wind up with these flats are not patient sellers, they tend to dump them as soon as they can, because the loss is taken by the distressed seller, not the banks

+ A drop in Rmb in recent days, may allow the sellers to accept lower HKD prices than one month ago

+ Buyers have been brainwashed into "expecting" lower prices - thanks to the work of the "Unholy Three" - and so Buyers-at-foreclosures are likely to bid at levels well below market prices.


Will this three-pronged (or four-pronged) attack drive prices lower? Probably.


=====

*If you are keen to see lower prices, then maybe you think this is a "holy" trinity. Personally, I would prefer less biased reporting - so they are "unholy" to me

You're thinking too much. Each of these entities are just reacting to the realities in the ground. Bottomline is to earn money. If lowering prices will earn them money (by increasing the number of txns), then they'll do it.

How is this some unholy trinity?


Banks can choose to adjust their valuations or LTV levels however they wish. Bankers must make projections of the future in order to make decisions today on how many loans to make, what type of loans to make, for how long and collateralized against what type of asset at what future values.


A banker adjusting his inputs into a model is a daily occurrence - you are just upset that he put a negative number into "Price Appreciation %" cell instead of a positive number like they have for the past decade.


When banks kept adjusting their valuations up year after year you had no qualm with it, but the second they inch them downwards you start speaking as if it is some nefarious conspiracy.


Agents instructing people to lower prices? This is just common sense. The market is in a freeze so they are suggesting to buyers to offer a little more and sellers to ask for a little less. The spread between buy / ask is too wide now and it is the specific duty of agents to help bridge this gap.


Again, for ages now agents have always been pushing "buy it right now because if you don't someone else will buy it in 5 minutes" - now that they aren't so rabidly on the side of property appreciation it is now a conspiracy against property owners?


As for the media, they were strongly pro-property for the past decade. Nonstop reporting of property appreciation, those getting rich, TV shows about property, articles on how many checks people submitted for lotteries (even though one person can submit multiple checks and get fully refunded, hence utterly meaningless), etc. You cannot walk around HK without being bombarded by ads, flyers, brochures, newspaper headlines of property, TV shows about property or news broadcasts about property.


Now they are reporting the opposite (but to a lesser extreme) and it is a conspiracy?


I think the conspiracy is by those who hold the irrational belief that asset prices must always go up contrary to all evidence that asset prices are cyclical and experience infrequent sharp downturns.


Now is the time for prices to come down, get used to it (and after they come down a good bit they will eventually go back up). And by the way, property prices coming down is a good thing because it reduces the cost of living for everyone, which is great. When potato prices fall we don't cry over the decline of potato prices. If clothing becomes cheaper we don't feel poorer, we feel richer! Property prices coming down is something to be celebrated not bemoaned. It will reduce housing costs for every citizen, it will reduce business operating costs as rents drop, it will make goods less expensive as overhead expenses drop (less rent). These are all good things.


What will really get the ball rolling on the property price depreciation is when the next bubble occurs in a new asset class. If, for example, gold jumped $200 USD next month and another $200 after that you'd see daily headline articles about how gold is galloping to riches and property is languishing in illiquidity. Then the hivemind and greed will rotate out of squatting on stagnant property and move into the new bubble, thus resulting in the crash of the old bubble.


This is just asset bubbles 101. You are in finance, you know how this goes.

"Each of these entities are just reacting to the realities in the ground. Bottomline is to earn money. If lowering prices will earn them money (by increasing the number of txns), then they'll do it."


Sure.

It SUITS THEIR INTERESTS to talk the market down:

They will probably get more business if they succeed.

And they may well be succeeding.


This is what happened in 2008, the parties aligned - and with the fears everywhere, and things like losses in I-Kill-You-Laters, the rug got pulled - and for several weeks, the market dropped by about 1% per week.


Add enough fear, and it could happen again.


But that does not mean it is REAL and sustainable, and it is does not mean the price discounts will last for long.


A persistent drop may require, some or all, of the following :


+ Rising interest rates

+ Falling rents

+ Supply rising faster than demand


I know some here see the Trinity's efforts as justified, and the "spin" as honest spin. Those who have waited a long time to buy, may be most eager to support those efforts.


But I shall be here, aiming to see through the spin, and the half-truths. And I invite others to join the efforts to keep the story straight.


Those who missed buying in the last dip, would have done well to keep their eyes on reality, and not get carried away by the emotion, and the shifts in sentiment which can be "manufactured" or "induced" by those with vested interests.

"When banks kept adjusting their valuations up year after year you had no qualm with it..."


The big difference is, there were transactions at those higher prices to justify higher valuations, and Centaline's index was also pushing higher.


No I see valuations being cut to levels well below the latest transaction. And meanwhile, the Centaline index is stable, trading sideways.


The banks seem to be ANTICIPATING a drop which has not happened yet, except with the occasional forced seller. This drop in valuations has the potential to FORCE The market down, since many buyers may simply refuse to pay more than the (artificially reduced) bank valuations.


Banks are being sued for manipulating LIBOR, I wonder if there is a win-able case for this rather transparent case of them trying to manipulate the property market?

Again, if banks expect prices to come down they will limit their exposure by lowering the valuation of properties. The lower the valuation, the lower the amount of loan a buyer can get and thus the bank's risk is lowered. There's no rocket science needed to understand it. It's all "normal" business.

They are lending 60% or less in most cases - so their risk is already low.


I think they have decided to "pull the rug".


I saw the same behavior in 2008. And it (basically) worked in driving the market lower.

That's one way they make money.

Most bank valuations have "taken a hit" of several percent since the end of 2013.


But I am not see much evidence of a Fall here:


Week : CCLI : CMMI :

==== . .

03/02: 118.02 117.12:

02/23: 117.77 116.91:

02/16: 117.59 116.52:

02/09: 118.08 117.34:

02/02: 118.31 117.32:

01/26: 117.56 116.47:

01/19: 118.20 117.19:

01/12: 117.71 116.65:

01/05: 118.94 118.08:

===

12/29: 119.07 118.19:


Hence the notion that an intentional manipulation is occurring

Was the same trinity responsible for the crash in 1997?

I think they had a very major role.

I watched them do it, without commenting.


Lloyd was then the one predicting (ACCURATELY) a fairly rapid bounce back.

And we saw that

I am still STEAMED UP - about what I see as a very real injustice,

where banks appear to be colluding with their developer clients.


Where you can most readily measure the difference between the Bank's lowball valuations and the real transaction-based market, it is TRULY SHOCKING.


I ask again, is there a win-able lawsuit in this manipulation?

There just might be, if this was happening in the USA

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LONG BEACH, Olympic Station update

=========


Hang Lung has slowly sold off most of its previously available flats


So last week, they launched 20 "new" units, and the first sales were processed on Saturday, March 8th. They sold three, which is not too bad, considering the price levels:


Flats sold were all in Tower 7:


47E (562 sf) at : $10.695M , or $8.983M after the max. 16% discount*

42E (562 sf) at : $10.610M , or $8.912M after the max. 16% discount*

31C (569 sf) at : $ 9.503M , or $7.982M after the max. 16% discount*


47E was the highest floor available in the sale,

and the other two were the popular "cherry wood" interiors.

The price on 47E (562 sf) was $18,879 psf, Net. before discount,

and $15,984 psf, Net after the max 16% discount for an rapid closing

Prices have been raised twice previously:

From $10.085M, to $10.589M, and to $10.695M (Dec.24, 2013) : overall rise; +6.05%


(There's no sign of a falling market in THESE real transactions, agreed just two ago.)


These prices are far, far above the bank valuations given on some equal or better units in the other towers. (I would say the actual discounted prices are at least $1 million higher than the bank valuations given for very similar units in other towers. Why? I think that are "accommodating" the developer, while "screwing down" the secondhand market.)


I wonder how much the banks will finance on these "new" flats? My expectation is that they would set the bank valuation at whatever price the developer has agreed. But if an buyer and seller agree to a price over the internet "bank valuation", they will ignore it, and instead use the lower bank valuation. The buyers expect that too, so chances are good they will refuse to pay anything much more than the (artificially reduced) bank valuations on the secondhand flats. If I am right, they the developers are getting better treatment, and I do not see any fairness in that. The result is, the developers are making sales, while wise landlords are refusing to accept heavily discounted prices for their equally good flats. The exception is the desperate sellers who simply must sell, and will take whatever the market allows them. They may not be aware of how bank valuations are distorting actual sales prices.


In the long run what's the difference between the "new" and "old" flats?


When they are eventually sold, they will ALL be secondhand. So the value of the banks collateral on "new" flats will fall in line with those in other towers. (Or secondhand prices may in time rise to the level of the new flats, when the banks decide to stop depressing their valuations.)


In summary, I think this system of matching bank valuations to sales prices for developers, and discounting them by $1 million or more for secondary sales, is give the developers an unfair and possibly illegal advantage.

A big responsibility lies with the buyer. They know the 2nd hand home prices as well as the price they're paying for a "new-never occupied but old" flat. Yet they cough up the dough. The sellers sell if there's a buyer.


On a different note, we've discussed Hang Lung's strategy of holding on to flats for a long time and they're not in a hurry to sell. But the recent sale of units disproves that notion. They need to sell. And they too can't predict the market peak (the optimum time to sell).

"I ask again, is there a win-able lawsuit in this manipulation?"


You would still need to prove it.


"How can the bank justify a higher valuation per SF, than for very similar units in the same development BUILT AT THE SAME TIME but sold a few years earlier?"


New flats are always more expensive. I am not surprised here.


I am surprised one would pay 10M for 500 sq. ft. You can get double that in NT!

"You would still need to prove it.'


The numbers prove the case - and it is particularly striking here.

I think a $100k-$200k difference might be justifiable, but not $1 Million.


Buyer are somewhat irrational, but what keeps them from buying the cheaper "older" units are two things:


+ "Suasion" from the agents who stand to make a 3-4% commission (without argument) on the "new" units- several have admitted this to me, and


+ The higher bank valuation, means they can finance the higher price at a low 2.25% interest (or whatever)


"I am surprised one would pay 10M for 500 sq. ft." -

It is 562 sf, Net (not 500 sf) - that's maybe 770 sf gross.


The property has good layouts, a fantastic clubhouse (one of the best in HK), and a great location - 8 minutes from Central. And the property nextdoor (Imperial Cullinan) is 20-30% more expensive.


You can sit on transport an extra 20-30 minutes (each way), if you want to. But not everyone wants that.

OTP, 8 minutes to Central? You must be talking by car, right?


From TLB to the Tung Chung Line MTR is already 5 to 8 minutes walk. The area is somewhat isolated.


As to clubhouses, almost all new multi-tower developments nowadays have great clubhouses...

The "trinity" work "together" to talk/push up the prices when times are good.


OP, it sounds like you're trying unload some properties but just not getting decent offers nowadays.

Nuin.,


One's view depends very much on where one stands.


Can you see any flaws in my logic?


I suspect there are a few others who also may feel they are being abused low the bank valuations. My case is so very obvious that I think it is hard to not see it. And I could not resist making the case here.


Others may suspect it is going on, and not be able to demonstrate it so easily as I can. Fact is, I wrote to one of the banks when I began to observe the discrepancy. And they did not even acknowledge my letter. Perhaps the HK banks are as arrogant as the banks who are now in court over Libor manipulation and other abuses. I suspect the HK banks are accustomed to having things their way, with few people voicing complaints. They might be shocked if someone did try to make a court case around this complaint. I strong doubt that I would actually do that now. But part of me thinks it would be interesting to see how they would react to a case like that.


From what I read and see on these threads, I think a majority here would probably like to see HK property prices fall, so I do not expect much sympathy.


But it would be nice to have people acknowledge the logic of what I have recorded here. And to consider how banks and other might be manipulating property prices and other markets; Is that a good thing or a bad thing? (A moral answer might come from deeper principles, not simply whether that benefits one personally or not.)

Punter, your:

"8 minutes to Central? You must be talking by car, right?

From TLB to the Tung Chung Line MTR is already 5 to 8 minutes walk. The area is somewhat isolated."


That might be possible by car (in no traffic). But I was talking about the train journey.


From Central to Olympic is maybe 8 minutes, and 31 minutes to Tung Chung. In both places you have to add on the walk from the station to the property. The walk from Tung Chung station to Caribbean Coast (for instance) is much longer than from OS to TLB. So, if you are talking door to door, you might have to add and extra 35-40 minutes for a journey to Caribbean Coast. I have made loads of both journeys over the year, so I think my time estimates are pretty accurate.


People used to talk about a "long walk" from OS to TLB (or to Hampton Place), but then Imperial Cullinan was sold at very fancy prices, and I heard much less of that talk. In the long run, I think talk of "isolation" will gradually disappear as:


+ Kowloon station and Park Ave/Central Park/Hermitage (and their malls) become overwhelmed by mainland shoppers -especially on weekends, after the XRL is completed and the trains start running in late 2015. (The sort of overwhelming might look something like what you now see in Tung Chung's gateway mall now on weekends. It was not like that when we first moved to TC. I find it unpleasant to go there on weekends.)


+ Shopping malls are built at Nam Cheong, where the walk is only maybe 50% further than to Olympian-1's malls


+ A Seven-eleven and maybe a coffee shop and restaurants are opened along with the boutique hotel in the lower floors of One Silver Sea


If this all happens, as I expect it will then - TLB, IC, OSS and Hampton Place will be seen as "pleasantly quiet", rather than "isolated".


We are quite happy to stay put, where we are in TLB, since I see the developments that I have described as "extremely likely"... eventually.

THE BATTLE - And What is next


(here's the battle being found by those selling properties in the secondhand market)


MINDING THE GAP - that's what 2nd hand sellers do


GDEP wrote:

"unless it is sold at or below bank valuation I will not buy..and given that the trend is declining i will probably need lower than the current bank valuation..."


Unfortunately, the secondhand sellers are very aware of the big gap between bank valuations and what their flats are "really" worth.


The secondhand sellers do not want to sell their properties below what they think they are worth. So prospective buyers make offers at or near bank valuation, and think they are making realistic offers - I had two such offers in the last two weeks. But the sellers are not interested.


I have responded to the offers I received with the comment: "You are about $1 million away from a realistic price", and the agents laugh. And I say: "Fine. I am happy living here, so I suggest your client buy another flat."


Yesterday one client did. ( I have not yet discovered what it was, or what he paid. The agents will not tell me.)


The way I see it: The prospective buyers want a superior product for an inferior price - they all know a much better view is worth more than the banks say it is. So it no transaction is going to happen. They can buy the no view, cheaper flats instead.


Meantime, the developer has no such problem, since the banks do not undervalue their flats, and the buyers are "fooled" into thinking they are paying a fair price.


But look ahead three years, and the guy who bought a reasonably priced secondhand flat may make money, or breakeven. While the guy who bought that more expensive new flat may find he has to sell at a loss.


Today's Standard has examples of sellers who lost money selling their overpriced "new" flats from Lions Rise


== ==


(THE BATTLE can go two ways):


1. The would be sellers will "win" if banks start pushing up their valuations to gain more mortgage business


2. The sellers will lose if enough of them give-in and cut their prices, and a new lower market prices is established, backed by actual transactional prices


== ==


If #2 happens (as seems likely to me right now), then the developers will be facing a situation where their prices look too high relative to the (reduced) secondhand prices. And they may have to offer even larger discounts to attract buyers.


So far, developers have been spared these need by the "stubborness" of secondhand sellers, and the complicity of banks in putting lower than market valuations on secondhand properties.


I wonder how much longer developers will enjoy their present "sweet spot"

HK Property Bears in Retreat


...as Ricacorp revises its 2014 forecast from 15% down to 5% up.


THEY FAILED - they could not break the market.


... So NOW the Trinity may start working together to push it back up again.

I pity those sad landlords who fell for the Bear Story and sold their flats at prices below $10 Million and below "fair value"


I expect the Luxury sector will go one seeing some softness, because of the High transaction costs.


Here you go, Punter (and others)

Will you believe it when you hear from the SCMP,

what I have been telling clearly for many months?:


RECORDS BROKEN ON SMALL FLATS


Shortage in the secondary market drives up some prices to record levels while a growing number of luxury homes are sold at a loss


Prices of small flats in the second-hand market have rebounded recently, with some units even changing hands at record highs.


This contrasts with the growing number of luxury homes being sold at a loss, as that segment has been hit hardest by the property market cooling measures the government imposed 15 months ago.


The rebound has prompted Patrick Chow Moon-kit, head of research at Ricacorp Properties, to revise upwards his forecast for home prices this year, from a drop of as much as 15 per cent to an increase of 5 per cent.


Agents expect the sell-out on Saturday of the first batch of 591 flats at Cheung Kong's City Point in Tsuen Wan to encourage more home seekers to buy flats.


"A 355 square foot flat at Serenity Park in Tai Po sold for a record HK$3.55 million last week. It surpassed the previous peak of HK$3.4 million in early 2014," said Anthony Man, a district manager at Centaline Property Agency.

. . .

Agents said many owners of mass residential housing units were willing to cut their asking prices by only 1 per cent to 2 per cent since April, rather than 3 per cent to 5 per cent previously.


By contrast, Chow said: "The demand for luxury flats remains weak..."

. . .


Analysts believe the rebound is mainly because of the shortage of small flats available for sale in the secondary market. There are about 50 flats at Kingswood Villas available for sale, compared with 200 to 300 flats before the measures were imposed.


"Many flat owners are reluctant to sell their flats because of the special stamp duty. They have to pay a special stamp duty of up to 20 per cent if they resell quickly. They would have to sacrifice a significant amount from their profit to pay the tax if they sold their flats," said David Chan, a director at Ricacorp.


Eddie Hui Chi-man, a professor of real estate at Polytechnic University, said: "Many flat owners don't think property prices will drop sharply in the short run. They would rather keep the flat for leasing, which offers a yield of 3 per cent."

. . .

==

> MORE: http://www.scmp.com/property/hong-kong-china/article/1524465/records-fall-prices-small-flats-rebound


If you think it is Truth Now...

Remember you read it here weeks ago.

I don't pretend to always get it right, but I think clearly (for myself) and do my homework. And there are some others here who do the same.

(In the Game of Chicken, it looks like the Landlords have beat the Unholy Trinity - What choice do the banks have EXCEPT to raise valuations?):


Supply tight for used flats - HK Standard

. . .

The supply of secondhand homes is falling as would-be vendors hold out in the hope that the selling price will soar in the coming weeks.

Property agents say it is not uncommon for several homebuyers to zero in on an apartment with vendors unwilling to negotiate cheaper prices.


Midland Realty chief senior sales manager for Tsing Yi district Roy Fan Chi-chung said speculative vendors are deciding not to sell their secondhand homes at the moment in a bid for more gains.


"The property market is bullish, pricing is aggressive ...


And with rents rising also, more owners are opting to lease their flats instead of selling.

==

> http://www.thestandard.com.hk/news_detail.asp?we_cat=16&art_id=146763&sid=42515509&con_type=3&d_str=20140626&fc=7


I would put it differently.

Landlords who might sell, are angry and p/ss3d off about bank valuations that are too low, and are taking their flats off the market, because Buyers and Agents are not coming up with realistic prices. The way to change that is for banks to beginning pushing values up higher to more sensible levels. This would increase transactions, and give the banks more business too.