Home seekers draw the line: it's too rich for us

HONG KONG: Hongkongers are used to paying top dollar for some of the smallest living spaces in the world — but apparently, even they have limits.

That point appeared to be reached last week when home seekers overwhelmingly baulked at buying a 401 sq ft flat for a hefty HK$5.97 million (RM2.39 million). In one of the worst responses to a property launch in recent years, only two flats at the royally-priced 96-flat Queen's Cube project in Wan Chai sold.

It was an embarrassing blow for the joint venture partners, Nan Fung Group and the Urban Renewal Authority, which have marketed the project heavily.

The response appears to be a clear and unmistakable message to the city's developers and the government: give us more living space at reasonable prices. Sky-high prices for new flats hardly big enough to swing a cat will no longer be tolerated.

Even the cheapest flat at Queen's Cube — the 401 sq ft one for HK$5.97 million, or HK$14,888 per sq ft — becomes smaller once the fine print is read closely. Excluding common areas, the saleable area is 275 sq ft, with the price working out at HK$21,709 per sq ft. "As Hong Kong homebuyers are usually quite market-smart about property values, the pricing of Queen's Cube could be an indication that buyers are no longer willing to pay 'any price'," the chairman of mortgage broker Pan Asian Mortgage, Leland Sun, said.

Other analysts said the Queen's Cube setback underscores several underlying problems besetting Hong Kong's housing market.

First and foremost is the fast pace of price increases in the primary market, which has spilled over to the secondary market and made it increasingly difficult for most first-time homebuyers to enter the market.

Sales of new homes make up 10% of total transactions, or close to 10,000 flats, so far this year. Of those, 60% were built by Hong Kong's two biggest developers, Cheung Kong (Holdings) and Sun Hung Kai Properties.

According to a survey by the University of Hong Kong commissioned by Citibank, about 60% of people in the city have no hope of buying a property in the next 10 years if prices remain at existing levels.

With new flats selling for record prices regardless of location, home prices in the secondary market have risen 48% since January last year, according to the Centa-City Leading Index, which tracks prices.

At the top end of the market, Henderson Land Development last month sold a 5,636 sq ft duplex at its 39 Conduit Road development in Mid-Levels for HK$338.16 million, or HK$60,000 per sq ft, making it the city's most expensive flat by price per square foot. Yuen Long also saw prices hit a new high last month when SHKP got HK$10.43 million for a 1,158 sq ft flat in Yoho Midtown, or HK$9,005 per sq ft.

The heat has spread into public housing, with average prices up 21% to HK$1.6 million per flat for subsidised housing and up 28% to HK$1 million for public rental flats in the second-hand market this year compared with last year.

"A bubble is fast being created in the primary housing market," the chairman of the Institute of Surveyors' housing policy panel Dr Lawrence Poon Wing-cheung said. To tackle rising prices, it is believed Chief Executive Donald Tsang Yam-kuen will focus on boosting the supply of homes and a home-purchase subsidy scheme in his annual policy address on Wednesday.

In his previous policy address, Tsang called on developers to build more small flats as a way of helping first-time homebuyers.

The city's major developers heeded his call — except there was a catch. Most new small flats in urban areas carry price tags way beyond the reach of most first-time homebuyers.

Besides Queen's Cube, other recent projects have been small and pricey: Gramercy in Caine Road, Mid-Levels, offered a 437 sq ft flat for HK$7.5 million, or HK$17,500 per sq ft, while a 425 sq ft flat in The Java in North Point sold for HK$5.2 million, or HK$12,234 sq ft.

Even in Yuen Long, a traditional location for first-home buyers, a 612 sq ft flat in Yoho Midtown was recently sold by SHKP for more than HK$3.8 million, or HK$6,300 per sq ft.

Transport and Housing Bureau figures released in July show 58% of the 61,000 private flats to become available in the next four years will be small to medium size. The Rating and Valuation Department defines small as up to 430 sq ft and medium as up to 750 sq ft.

Instead of catering to lower- income groups, small flats are increasingly attracting investors who can afford to buy several at a time, David Ng, head of regional property research at the Royal Bank of Scotland, said.

Executive Council member Lau Wong-fat was forced to make a public apology after he was found early this month to have failed to declare the purchase of 16 flats in Yoho Midtown in February. All the transactions were made through Carofaith Investment, of which he holds a 40% stake.

"Today buying new flats is a game for rich people," Ng said. "Supplying small flats is wasting resources and cannot relieve the liquidity-driven rally or mismatch of supply and demand."

With low interest rates and excess liquidity, he said, first-time buyers have been squeezed out of the primary residential market. "It is true that first-time buyers can purchase older flats in remote locations in the secondary market," he said. "But do we want a community like this? The answer is absolutely not."

Ng emphasised that developers got away with charging high prices because of the short supply of new flats which was in turn due to a shortage of land. He attributed the land shortage to the government's decision in 2002 to drop regular land auctions in favour of an application list scheme. "The government's change in land supply policy is to blame primarily for the bubble forming in the housing market today," he said.

Pan Asian Mortgage's Sun agrees the government should not have stopped land sales when prices were falling. "They should have moderated land sales, but never stopped them completely. The market is now feeling the effect: the landlords which have excessive land banks have been holding off on selling their flats waiting for this moment. With property prices in 2008 and 2009 falling dramatically [worldwide], why did Hong Kong property not decline, but increase by a whopping 25 to 65% [in the mass and luxury sectors respectively]?"

In the first nine months of the year, developers only offered 466 flats priced at HK$2 million or below for sale, compared with 915 last year, 517 in 2008 and 3,234 in 2007, according to data compiled by Midland Realty. Almost six in every 10 flats sold by developers in that period were priced above HK$5 million, Midland says.

Over the past decade, developers' pricing was largely based on prices of nearby flats of similar size on the second-hand market, the Institute of Surveyors' Poon said. They took these prices and added 20% to 30%. It was a rational and reasonable reference for developers in setting prices for new flats.

But Poon said pricing had changed in the past two years and developers were no longer basing prices on the second-hand market. "Prices of new flats are decoupling from the secondary market... The pricing gap between the primary and secondary market has widened," Poon said.

The relaunch of Henderson Land's 39 Conduit Road development fetched as much as HK$60,000 per sq ft, compared to HK$11,000 to HK$20,000 per sq ft for nearby flats.

Developers are blaming rising building costs for the widening gap between new and second-hand prices. In defending its high-price strategy, Nan Fung's deputy general manager for property, Raymond Lai, said Queen's Cube cost HK$4,000 per sq ft to build. "Construction costs for the firm are highest in recent years."

But many people give another explanation for sky-high prices. The chairman of the Hong Kong Institute of Marketing, Yim Kai-ming, said no other sector faced as little competition as property development. "[Developers] are so powerful that they can use heavy advertising campaigns to create new value for their projects even though they are not in traditionally prestigious locations," Yim said.

Cash-rich developers also had strong "holding" power that allowed them to decide not to sell their projects at what they considered too low a price, Yim said.

For example, Hang Lung Properties has been hoarding more than 1,500 flats worth an estimated HK$20 billion for at least six years — 284 flats at Harbourside in Kowloon Station, which was completed in 2003, and 1,234 at Tai Kok Tsui's Long Beach, which was completed in 2004 — to wait for prices to climb higher.

In its 2009-10 annual report, chairman Ronnie Chan Chi-chung said he wanted to "wait a little longer for the best opportunity to release" them for sale "over the next few years".

Sun said little could be done to address the hoarding issue because the government had decided to allow the property sector to regulate itself. — South China Morning Post
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