Massive rains and golf-balls sized hail pelted Hong Kong this weekend, but the weather did not stop the throngs from showing up and cheering on the annual Rugby Sevens. Yet surely it was a tough year for the scalpers, who gather outside the stadium on game days to sell coveted tickets at huge mark-ups to official prices. The rain and dark skies must have given the buyers the upper hand in this year’s price negotiations.
If there is any city which understands the ups and downs of speculation, it is Hong Kong. Its property market is among the most volatile in the world-and has recently been getting hit by its own sort of hail storm. Leading banks are sharply cutting valuations for property loans, distressed sales are emptying out a few marginal luxury developments, and in the mass market, buyers are snubbing –10% to –15% discounts.
This comes as many are betting that the froth built up in Hong Kong’s market several years ago-on the back of Federal Reserve’s QE and China’s massive stimulus-has not sufficiently deflated. Hong Kong has been at a standstill in the past two years, as local anti-speculation measures, combined with China’s tightening and expectations of eventual Fed tightening, led to uncertainty in the property market. Buyers have been waiting for bigger discounts, but sellers have also been holding out. Now, it increasingly looks like sellers are starting to blink.
For one thing, everywhere in the global market landscape, “froth” just looks to be coming under pressure. In this sense, the weakness in Hong Kong’s luxury property market is the same phenomenon affecting the US bio-tech and internet sectors. Their rich valuations look vulnerable in a world where bond yields seem to be rising, and super-loose monetary conditions marginally tightening.
As expectations change, sellers who have been digging in can very quickly find themselves capitulating-along with hordes of other former hold-outs. In particular the focus is on mainland Chinese buyers who have been major players in Hong Kong’s property market in recent years, but now seem to be turning tail. Tighter credit conditions back home may be leading to liquidations here. This may be what some banks in Hong Kong expect as they cut valuations they offer for mortgage loans to below market rates. Like those scalpers in the downpour outside of the Sevens stadium, it might just be time to take the best price on offer, or else get stuck with a soggy and useless ticket.
Any coming correction in Hong Kong’s property market would be set against tight supply conditions. Actual completion of new private residential units dropped by -17.8% to 8,300 units in 2013, while the vacancy rate fell to 4.1% at the end of the year, the lowest since 1997 and well below the average of 5% in the past 20 years. But some sizeable deflation in Hong Kong’s property prices would come as a relief in a market where affordability ratios are at levels comparable to the 1997 peak.
While Hong Kong’s physical market has been somewhat frozen in the past two years, its stock market has already adjusted, with near-record low valuations in some sectors. Indeed, as more and more froth comes out of the popular asset classes of the past few years, we may see more flows into value plays. Asia has plenty of such opportunities, not least of which, ironically, is the Hong Kong stock market.
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