Hong Kong home prices not expected to grow

HONG KONG: The poor response from bidders to the last two land auctions has convinced analysts they were correct to change their forecasts for the outlook for home prices by the end of the year from positive to zero growth.

And although the market consensus is that prices will not end the year lower, short-term declines of 3% to 10% could be unavoidable over the next two months before a recovery to present levels -- where prices should remain until the end of the year.

The wave of revisions to forecasts began after the government introduced measures in April to curb price growth in the market. They continued after a residential site in Fanling was auctioned for HK$1.33 billion (RM560.8 million) on Monday, May 24 -- at the low end of forecasts -- a result that followed on the May 11 auction of a residential site in Tung Chung that attracted only two bidders and was eventually sold for HK$3.42 billion, or about 5% below the bottom end of forecasts.

Alnwick Chan Chi-hing, the executive director at consultancy Knight Frank, revised his forecast for property prices from positive to flat this year. His decision was prompted by steps taken by the government to curb price growth but reinforced by the results of the auctions.

"The government is trying to cool the property market by increasing the land supply. They will definitely increase the supply of mass residential sites," Chan said. "The two disappointing land auctions this month reflected developers becoming pessimistic about the market outlook. Property prices will be flat this year."

Lau Chun-kong, international director and head of property consultancy Jones Lang LaSalle's valuation advisory services, said market sentiment had changed. "We were previously forecasting that property prices will continue to rise. However, we now believe they will be flat."

Lau said the auction result suggested developers would no longer hold off releasing their new projects as it was clear that the government intended to increase land supply. He forecast residential supply would rebound to normal levels of about 15,000 units a year as a result.

"Property price movements depend on the economy and interest rates. But the upside potential in prices will be limited because residential supply will return to normal levels," he added.

The new mood of caution is evident even among property agents, who are traditionally the most bullish about the outlook for prices. "The price fetched by the Tung Chung site was far below expectations and this will make some buyers hesitant about entering the market," Buggle Lau Ka-fai, the chief analyst for agency Midland Realty, said.

At the end of 1Q, Lau forecast prices would continue to rise in 2Q, supported by a rise in home sales which he expected to rise to 30,000 deals from the 29,500 done in 1Q. He changed this view after he saw home sales decline as a result of the government measures. He now expects property prices will drop this quarter and sales will decrease 20% to 24,000 deals only.

Writing in a newspaper column, Shih Wing-ching, the chairman of agency Centaline, said that he expected property sales to drop 30% this quarter from the first.

"End-users will postpone their plans to buy flats after the disappointing land auction. However, most flat owners would not cut their asking prices as the economy is improving. Property prices will drop 3% only," he said.

Early this year, Credit Suisse analyst Cusson Leung forecast property prices would rise about 10% in 2010. But he has turned cautious recently. "Prices will drop 5% to 7% in the coming one to two months," he said. Leung said investment demand has fallen as a result of the measures taken by the central government to restrict lending for properties worth more than HK$20 million. The negative impact this had on the Hong Kong market was greater than expected, he said.

"A few months ago, many analysts thought the mainland buyers would continue to come into our property market. But in fact their [mainland buyers'] money is as smart as everyone else's. They were focused on a chance of making profit," he said.

Now Leung expects no growth in property prices in the next few months, although he believes the situation will improve. "We are still faced with tight residential supply, and inflation will get worse in 2H. Property prices will rebound 5% to 10% by the end of the year."

Looking further ahead, Eric Wong, joint head of Asia property research at UBS, said he would maintain his forecast of a 35% rise in home prices by the end of next year. "I don't see anything that will trigger a sharp fall in prices, although a consolidation of 3% to 5% could occur in the next few months."

Paul Louie, the regional head of property research at Nomura International, said he would not change his forecast that prices would increase 20% this year and next unless there was tightened mortgage lending. "One or two land auction results will not affect our prediction." – South China Morning Post