Lessons From Hong Kong Property Bubble

When chief executive Tung Chee-Hwa of Hong Kong’s first post-handover administration promised to achieve a 70% home ownership level within 10 years by backing the construction of 85,000 flats a year by the public and private sectors, he worsened the slide of the property market that was already overblown.

GOVERNMENT POLICIES

According to media reports, average home prices plunged 70% from its market peak in 1997 to HKD 2, 428 per square foot in August 2003. When property prices were at its lowest, the government suspended land sales in an attempt to support the market. This resulted in today’s shortage of new housing, which pushed home prices up to more than 13 times the annual household incomes.

The market soared 268% from its lowest in August 2003 to HKD 8,94-1 per square foot in November 2013.
Prices in 2013 surpassed the 1997 peak by Fifteen percent, with risky fever getting driven flat values to the next high.

This led the government to doubling stamp duty for flats and non-residential properties worth more than HKD 2,000,000 in February 2013 to head off a property bubble.

PROPERTY MARKET 2013

According to Midland Realty, a Hong Kong Property agency, the governments curbs saw residential transactions in the secondary market tumble to 17,872 between June and December 19,2013.

This is a significant drop from 23,0/39 deals recorded in the secondary market in the first half of the year.

Flat values surged 7% in the first three months to March 2013,but started to decline after cooling measures had dented demand.

The 2.6% increase in home prices in 2013 is lower than a 23% gain in 2012.

CURRENT SITUATION (2014)

Mortgage rates may rise in Hong Kong in 2014,due to the tapering of monthly bond purchases by the US Federal Reserve.

This would reduce the affordability of residential real estate, which in turn would lead to a downward pressure on residential capital values.

CBRE Taiwan, Macau and Hong Kong senior managing director Craig Shute said to the media that more than 30,000 residential units could potentially hit the market this year.

It in possible that a few developers might offload stock before the lending rates increases further.

The combination of increasing rates and new residential supply being sold at discounted prices may lead to a mass-market price correction of 5 to 10% by the end of the second quarter of 2014.

LESSONS TO LEARN

What can investors learn from the above developments? The movements in the property market are influenced by policies implemented by the authorities and also through economic factors.

The rise and fall of the volume and values of I property transactions is normally preceded by such developments.

Therefore, it is important for investors to be conscious of the fact that the property market f- isn’t motivated by the blind belief that it will r continue to rise.

Just as there are economic cycles where economies can both rise and fall, the same is applicable r! to the property market.

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