Time for caution

HONG KONG (Dec 28): In stark contrast to the buoyancy at the start of the year, Hong Kong's red-hot residential market draws to a close with extreme caution as sales slump and prices fall.

The decline in sales comes amid growing concerns about policy risks, availability of credit and mortgage rate hikes.

The punitive special stamp duty of up to 15% on homes bought and resold within 24 months, and the stiffer mortgage lending rules, especially for homes worth more than HK$6 million (RM2.45 million), have combined to put the brake on the runaway market.

In the first six months, home purchase sentiment remained relatively strong and prices continued to surge despite the government's repeated pledge to impose cooling measures to alleviate the risks of a property bubble burst. According to the Centa-City Leading Index, average residential prices increased by more than 10% in the first half and reached a record high around June and July. Compared with the 2008 trough, average home prices had nearly doubled, and in the luxury sector the price rally was even more stunning.

In the third quarter, growth began to ease. Prices fell in October, though the pace of their correction was confined to single-digit percentages in most properties, especially those in the city centre or on Hong Kong Island.

However, land auction results earlier in the year appeared to indicate an imminent market correction. At a government auction in June, a prime site on Borrett Road in the Mid-Levels was taken by Cheung Kong (Holdings) at a price of HK$11.65 billion, well below surveyors' expectations of up to HK$15.2 billion. In August, a huge luxury site at Kau To Sha in Sha Tin was sold to the first and only bidder — a consortium comprising Kerry Properties, Sino Land and Manhattan Group — in just five minutes at another government auction at the opening price of HK$5.5 billion, 16% lower than the lowest market estimate. The bidding results reflected developers' increased caution.

What has caught some people by surprise is perhaps the sharp plunge in sales in the second half of the year. According to Land Registry records and statistics provided by Midland Realty, secondary residential sales volumes stayed in the region of about 7,000 to 10,000 transactions per month in the first half of the year. Activity slumped significantly in the second half to fewer than 5,000 deals a month, with volume contracting to 3,939 in October and 3,727 last month.

On the contrary, the primary market has become more active, with 811 registered sales in October and 1,184 last month.

"The activity contraction has been very serious this time. The situation is even worse than what happened after the 2008 financial crisis," says Buggle Lau, chief analyst of Midland Realty. "With a big drop in transactions, the secondhand property turnover rate for 2011 is likely to settle at to about 6.7%, a sharp decline from 11.2% for 2010. The special stamp duty and the lower loan-to-value ratio adopted by local banks are taking their toll on sales activity."

According to Lau's estimate, the transaction volume of secondhand residential properties this year will see a 40% decline from last year.

But firsthand properties did rather well in comparison. Developers released several new projects for sale. Cheung Kong, Sun Hung Kai Properties and Sino Land are among the biggest property sellers.

The largest developments put on offer include Cheung Kong's Festival City in Tai Wai and La Splendeur in Tseung Kwan O. Sun Hung Kai Properties was selling The Wings, also in Tseung Kwan O, and Imperial Cullinan in West Kowloon. Sino Land has released several projects such as One Mayfair in Kowloon Tong and Providence Bay in Pak Shek Kok.

Kerry Properties' projects included Lions Rise in East Kowloon and Soho 189 in Sheung Wan, while Wing Tai Properties kicked-off the sales of The Warren in Tai Hang.

The primary sales market has been the focus of market attention in recent months as developers launched new projects at more reasonable prices, carrying a price premium of 10-20% over secondary market values instead of a staggering 40-50% premium at the start of the year.

"The residential market is in the doldrums now that transaction volumes have slumped significantly.

"There is no sign of speculators and homebuyers are very cautious about concluding a deal," says Wong Leung-sing, associate director of research at Centaline Property Agency.

With policy concerns, increased mortgage rates and prevailing uncertainties over global economic growth, subdued buying sentiment and slow sales are expected to prevail in the short term. — SCMP