Property prices in Hong Kong too hot to handle?

HONG KONG: Analysts are divided over whether a mismatch between soaring property prices and stuttering economic growth should be ringing alarm bells for homebuyers in Hong Kong.

While Hong Kong property prices have soared to the second highest in the world, growth in the city's gross domestic product has fallen to the second lowest of 13 countries in the region over the last decade.

"A slow GDP growth represents a mild growth in our underlying economy and personal income. How can it support a sharp increase in property prices?" David Ng, head of regional property research at The Royal Bank of Scotland, said.

But some investors and property analyst Eric Wong Chun-yu of UBS disagree.

"Historic GDP growth may have been low. But that is history," Wong, joint head of Asia property research at UBS, said. Fuelled by a strong GDP growth forecast this year, growth in wages, and sustained high liquidity, he expects property prices will surge by 35% by end-2011.

Research by the Royal Bank of Scotland and CEIC Data Company shows that Hong Kong's GDP grew at a compound annual rate of 2.6% between 1999 and 2009, joint second last in the region with Taiwan. Japan was ranked last with a negative annual growth in GDP of 0.5%.

Beijing and Shanghai recorded compound annual growth rates in their economies of 16.1% and 14% respectively over the 10 years ended 2009, to be ranked the second and fourth fastest-growing economies. Fastest was Indonesia at 16.5%.

But even though Hong Kong's economic growth was poorer than the other Asian cities, growth in domestic property prices has outstripped all the other cities.

Data from online property research house, Global Property Guide, show that the current price of a 120 sq m apartment was US$15,424 (RM50,907) per sq m in Hong Kong. Singapore was ranked the fifth most expensive at US$10,723 per sq m -- but unlike Hong Kong that ranking was supported by compound annual growth in the city's economy over the decade of 6.3%.

And despite ongoing modest economic growth in Hong Kong (2.6% in the fourth quarter of 2009 and forecast to grow between 4% and 5% in 2010), the Centa-City leading index of mass residential prices was up 6.6% in the first two months of this year, following an increase of 35% in 2009.

The growth in property prices has been fuelled by an influx of liquidity and resulting low interest rates, as well as strong mainland buyer demand and has exceeded the best expectations of analysts such as Ng.

Middle-class upgraders were key demand drivers in the market, he said. But they had not enjoyed substantial growth in income over the past few years, which put most 1,000 sq ft units in Hong Kong Island out of their budgets. "If they are not bullish on their income growth, how can they be bullish on the property market?" Ng asked.

Ng owns a single flat in West Kowloon's Olympic Station area, which he bought in 2007.

"The price of my flat has jumped 40% already. Much higher than the wage growth. I may not have been able to afford it if I had tried to buy it now.

"Our economy is still relying on the financial and property sectors and lacks a new driver. It will not be easy to find a solution in the short term," Ng said.

But veteran investor Lai Ni-jan holds a more optimistic view of the outlook. Lai bought three units at Henderson Land's Hill Paramount in Sha Tin last week at a total investment cost of HK$60 million. The developer offered a 5% discount and will pay Lai's stamp duty.

Explaining his confidence about making a capital gain from his investments, Lai said developer Cheung Kong would soon be launching its Festival City in the area at a price of HK$10,000 per sq ft.

"That will boost the capital value of my flats at Hill Paramount," he said.

He expected property prices to rise by 15% to 20% this year.

"Property prices will still be affordable even if the mortgage rate rises to 5% from the existing 3.5%. The mortgage rate was more than 10% in 1997," Lai said. The biggest risk to this outlook, he said, was if there was a sharp rise in mortgage rates.

The risk of such an event was low, however, according to Wong.

"The global economic outlook remains uncertain. Interest rates will not rise as much as some in the market expect this year," said Wong, who remains bullish on the property market.

Fuelled by a strong GDP growth forecast this year, growth in wages, and sustained high liquidity, he expects property prices to surge 35% by end-2011.

Last month, Financial Secretary John Tsang Chun-wah forecast Hong Kong's GDP growth would reach 4% to 5% this year. The city's GDP was negative at 2.7% in 2009. – South China Morning Post