Doc B's Summary of the HK Property Market

Ed has told me that he does not like links going outside AsiaXpat, and so I am quoting a long post from elsewhere showing Doc B's latest summary of the Hong Kong Property market.


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Let's start with a look at:

Three Representative Projects: Hong Kong Island, West Kowloon, & N.T.

image: http://img269.imageshack.us/img269/3813/001wd.png

To me, they look a bit "toppy" now.


I have changed my view slightly after pondering the impact of the current tight supply. I now think it will take longer to rollover. Many weeks or a few months perhaps, rather than just days.


I see: Four main possibilities.


The two least likely IMHO are:


1/ An immediate slide begins:

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Why unlikely? There isn't enough supply. In the two areas that I am most familiar, Tung Chung and Olympic, the agents "have no keys." That is, there are very few vacant flats available, so the agents often cannot show flats immediately. In the current key-starved market, they need to call the owners, who will then agree to show a (furnished and occupied) flat at a mutually convenient time. The buyer's alternative is to buy new flats as they are launched. And these are mostly available at very "silly" prices, 20% or so above secondhand. Most sellers (like us) cannot believe how high the primary market prices are now, so they are lifting their own sales price targets, waiting to see if eager buyers come forth. When they do, the prices achieved on secondary sales are high. In such a market, I don't see how prices can begin an immediate slide. There simply is not enough supply. It will take time for that to emerge. Perhaps a slide in stock prices will make people nervous, and bring more supply into the market. But there are no clear signs of that yet.


2/ The market keeps going, higher and higher:

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The sentiment has become, outrageously bullish, and "feels like" it did at the 2008 top. I don't think that it has the look of a market that can keep rising when the sentiment is one-sided and so bullish. Healthy markets usually "climb a wall of worry" and the number of people worried now seems just too low to me.


Although prices are at or above those 2008 levels, and there is some talk in the press about how "high" prices are, the buyers are still coming out - and there is talk by agents and buyers alike that they do not want to "miss out" on buying before prices go higher still. To me, the current market sentiment appears imbalanced and unsustainable and "fueled by bullish complacency" which tends to be very temporary and is unlikely to permit much more upside. Moreover, the fundamentals are still not right for an ongoing rise IMHO. Too many areas of the HK economy are showing economic weakness and there are still job losses in many sectors. Interest rates have been at the "lowest levels in history" for a many months now. Homebuyers seem to have decided that higher rates are a long way off, but is that really true? There's plenty of room of unhappy surprises. Meantime, across the border in China, credit is tightening, and interest rates are beginning to rise. So I do not see the market continuing on its upwards glide, since it is now fueled an unsustainable type of sentiment.


More likely, would be one of the following two possibilities:


3/ The market spikes up to an important cyclical peak, and dies:

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With the "key shortage", as described above, and the flood of mainland buyers, it is possible that the market can "spike upwards" in a cathartic final move - jumping up by another 5-10% (or even more) very quickly. If we see that, it would be likely to kill off the market for many months or even years. I think this is what the government wants to prevent, and they are pressuring the developers to come up with more supply, especially for the middle market, while raising stamp tax on luxury flats, and cutting maximum LTV (to 60%) for luxury flats. If there is a further jump, the government might then boost government land sales, which would not be good for the market 2-3 years out. That might lead to a cyclical slide lasting years, and bring forward to 2010, the peak in the long cycle, which I now think is coming in about 2015-16.




Image: http://img51.imageshack.us/img51/2076/001ep.png


4/ The market slowly rolls over, within the next quarter (Q2) or so:

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DANGER !

...Is written clearly in the prices movements of Henderson Land (HK:12- see attached chart.) For decades, this stock has been one of the most accurate early bellwethers for the HK property market, signalling turns, sometime months in advance of the moves in physical property prices. For example, the stock peaked in late 1996 at near $80. This was the first peak in a "triple top" structure, with the third and final top in early August 1997 at $77. By comparison, the Centaline property index made a double top in June and October 1997. Henderson was showing a steep slide beginning early August 1997, and by the time the Centaline index peaked nine weeks later in mid-October, was already 25% off its third peak.


Again in early January 2008 this critical stock peaked once again at near $80, while property rolled over slowly several months later between April and July 2008. A big initial selloff in HK-12 down to $50 in March (about 37% off the high) was a sign that the property cycle was ending. Henderson made a secondary peak at near $61 in early May, just as the rollover in physical property was getting underway.


Recently, we saw HK-12 trading back up to $60 in early January 2010. It subsequently slid about 24% back down to $46, and then rallied again, and has been making a secondary high near $57, just like it did in 2008. Is history repeating itself? By comparison, the Centaline Index (CLIX) is still making new highs for 2010. My view is that we are now seeing another slow rollover that may take weeks or even a few more months.


The recent pattern looks strangely similar to what we saw in 2008, with CLIX requiring many weeks to top out, finally beginning a bigger slide in late summer, while Henderson began a slide in January. If higher rates and/or sliding stocks push the builder stocks below the Feb. low at $46, then I would expect the Centaline index to peak out too, and be in a falling mode as we head into Q3. A double dip global recession while many governments struggle to keep QE programs alive in the face of sovereign debt pressures, could be a likely economic background, bringing about a renewed slide in global property prices, incuding those in Hong Kong.


I do not expect HK property prices to slide all the way back to SARS levels. A sharp correction, perhaps nearly as deep as we saw in late 2008 would not be the end of the world for property investors. Many of them have low debt levels, and could survive a period where rents and prices slide, while rates pick up. Thus, a double dip drop in property, if we see that, could simply provide another good buying opportunity, before the HK market embarks into a spectacular blowoff in time for the expected 2015/16 peak in the 18 year cycle.


Like some other observers of the HK property scene, I think a dropping of the HKD peg to the USD would be good for HK property. It could bring a flood of new capital into HK property, seeing HK as a lower risk way of playing the "China story." I don't see depegging occurring just yet. Maybe in 2012-13. An adjustment in the peg, in response to stress on property prices, could be the trigger for the last big rally of the second half of the 18 year cycle. Fred Harrison calls that final period the "buyer's curse" phase, and that is when the most spectacular gains often come. Perhaps we will see that going into 2015/16.

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I hope you find this of some interest

As I have stated... we do not allow links off to other sites that duplicate our content...that's like Watsons allowing marketing people to hand out flyers in their shops... let's not confuse the issue...

No problem, Ed. I will try to respect your policies. You have some good discussions here, so it is worthwhile to keep them going, I think