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Friday, August 03, 2018, 09:15
Beware HK's property market bubble bursting
By Peter Liang
Friday, August 03, 2018, 09:15 By Peter Liang

Some of the largest developers are cutting prices for the first time in many years to help speed up the unloading of their stocks of new apartments. If you think that signals the tipping point of the crazy housing market, you could be in the minority.

Results of a Citibank survey released last Thursday showed that 70 percent of the respondents said they believed housing prices will continue to rise in the next 12 months. The survey conducted by University of Hong Kong’s Social Sciences Research Center for Citibank polled more than 500 people by phone in June.

Of course, the economic environment has changed quite a bit since then. But the enthusiasms of the prospective homebuyers, especially the younger generation, have not waned.

Before running out to buy your dream home at record prices, it pays to remind yourself of the agony of negative equity

A recent survey showed that the majority of the respondents, all in their 20s and 30s, said that their goal in life is to buy a home. Among this group, many said they would not have any second thought about asking their parents for financial assistance to pay the down payments in securing mortgage loans from banks.

So it seems that the developers were right in saying that the demand for housing by prospective homebuyers in Hong Kong is “inelastic”. But they also recognize that affordability has its limit, which is defined by the availability of easy credit.

Recent studies have shown that many homeowners who bought their properties in the past several years are paying up to 80 percent of their monthly household income on mortgage payments. An increase in interest rates from their current low levels could make it difficult, if not impossible, for them to hold on to their properties.

That’s not seen to be much of a problem if they can sell the homes which they can no longer afford at higher prices. Indeed, people are still buying properties in droves in the belief that prices will never come down.

Such irrational exuberance is worrisome to some economists, who warned that it is paving the way to financial calamity that can be set off by a sudden jump in borrowing costs together with a sharp economic downturn.

The bursting of the Hong Kong property bubble is not looking as far-fetched as many homebuyers and property analysts have led you to believe. It is not clear why some major developers are willing to cut prices now to sell the apartments they built. They could be in a bigger hurry to clear their stocks at a time of more thickening economic clouds than people have thought.

Some analysts tried to interpret the move as an attempt by developers to deflate the bubble rather than allowing it to burst when the crunch comes. In fact, a progressive and controlled decline in prices is much more preferable to a sudden crash, which could unsettle the banking system and cause highly damaging economic and social stress.

The trend of rising interest rates is widely recognized and accepted after six rate hikes in the United States since late 2016. But it was brushed aside by many investors and prospective homebuyers while banks in Hong Kong have kept their lending rates unchanged despite the rapid rise in their cost of funds.

Hong Kong people continued the rush to buy properties. Sales of apartment units in the first six months of 2018 amounted to a 21-year-record of nearly HK$400 billion. Even parking spaces in housing estates have become tradable assets of value hoarded by investors and speculators.

Meanwhile, a darker cloud in the form of a trade war between the United States and the Chinese mainland has gathered on the horizon. Its impact on Hong Kong’s external-oriented economy can be more serious than rising interest rates.

A sharp slowdown in economic growth resulting from declining trade through Hong Kong could bring about rising unemployment and lower wages, making it more difficult for families to service their mortgage debt. More important, a depressed economy can sap public confidence in the asset market. The resulting rush to sell assets could send prices into a tailspin.

Before running out to buy your dream home at record prices, it pays to remind yourself of the agony of negative equity. If that won’t make you change your mind, nothing else can.

The author is a current affairs commentator.

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