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Hong Kong says ready to avert possible property bubble

HONG KONG: Hong Kong will track property prices and could increase land supply for residential development, Chief Executive Donald Tsang said on Oct 14, as record prices for luxury flats raise concerns about a possible property bubble.

Residential property prices in the city have surged 26% this year, despite the economic downturn, amid a low supply of new apartments and strong demand for luxury property from wealthy mainland Chinese.

Hong Kong's government, which tightly controls land supply, has not held residential land sales for a year and a half.

"The government will closely monitor market changes in the coming months. When necessary, we will fine-tune land supply arrangements... with a view to quickening the pace of bringing readily available residential sites to the market," Tsang said in his annual policy address to the Legislative Council.

"The relatively small number of residential units completed and the record prices attained in certain transactions this year have caused concern about the supply of flats, difficulty in purchasing a home, and the possibility of a property bubble," Tsang said.

In the latest sign of that prospect, two 4,000 sq ft penthouses in a luxury development on the Kowloon peninsula with panoramic views of the city's iconic harbour were put on the market for a record HK$75,000 (RM32,681) per square foot -- a stratospheric price tag of nearly US$38 million (RM128.33 million), making them among the world's most expensive apartments.

Hong Kong's currency peg to a weak US dollar is making property attractive to overseas investors, analysts say. The peg forces Hong Kong to track US interest rates -- which are expected to stay at very low levels for some time -- unlike South Korea, which has threatened to raise rates soon to stave off a property bubble.

In recent months, major developers including Sun Hung Kai properties and Henderson Land Development have aggressively wooed millionaires from China with a slew of all-expenses paid property-viewing tours.

Henderson this week asked nearly HK$360 million for a 5,600 sq ft luxury duplex nestled in Hong Kong island's verdant hills. In September, a cramped 1-bedroom 590 sq ft apartment in a gritty downtown Kowloon district sold for just over US$3 million, or around US$3,800 psf.

"People are paying what I describe as trophy prices which don't bear any reality with what's happening within the economy," said Nicholas Brooke, chairman of real estate consultancy Professional Property Services in Hong Kong.

"I don't think what we're seeing is sustainable in economic terms anyway, but as long as people have egos and as long as people seek status, if you like, in owning luxury property... that's driving the figures and prices."

In comparison, a property overlooking the river Thames in London would go for about £2,000 (RM10,800) psf, while an apartment overlooking Central Park in New York would be on the market for about US$4,000 psf, Brooke said.

Money raised from company listings on the stock market and easy bank lending to Chinese businesses are also enabling mainland Chinese to snap up luxury property, he said.

Nomura estimates that mainland Chinese now account for 11% of Hong Kong property transactions and warns that the conditions for a bubble are now in play.

"Strong liquidity, low supply, strong external demand and aggressive mortgage lending are creating ideal conditions for another housing bubble in Hong Kong," Nomura property analyst Paul Louie wrote in a report.

The city's last property bubble in the late 1990s burst with the onset of the 1997/98 Asian financial crisis, triggering a 70% plunge in apartment prices over the following six years that destroyed household wealth and hurt the economy.

The sort of heady speculative buying of property seen in the late 1990s is not yet apparent in the current boom, however.

Keith Yeung, property analyst at Mirae Asset Securities, says market reaction is more similar to that of 2004/05 when property prices surged 34% in 2004 at the start of the market recovery but gained only 6% the following year.

"The price increases will happen early in the cycle, similar to 2004/05," Yeung said. He expects prices to rise by just 5% to 10% next year, arguing that supply conditions will gradually improve and interest rates will start to rise. -- Reuters

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