Peter's Perspective
17th March 2015 by Peter Churchouse

No Bargains Any Time Soon…

I just wanted to drop a short note on my outlook for the Hong Kong property market…

Hong Kong’s residential real estate market is surprisingly straightforward.

It’s just supply and demand.

Demand? Since the GFC induced dip we’ve had record low interest rates in a growing economy with full employment. Low mortgage costs, lots of liquidity, rising incomes and high employment = lots of demand. And not just from residents, from mainland Chinese as well.

The supply side? In recent years production of private housing has dropped to less than fifty percent of the longer term average production of 24,000 units per year. There simply has not been enough supply coming to market.

Low supply + Strong demand = Price Increases.

Economics 101.

Government measures to cool the market worked (higher stamp duties and restrictions on non-residents), but just for a while.

So where to next?

Supply is increasing in the coming years from around 10,000 units to around 16,000 per year. Still modest compared to history.

Interest rates are set to rise courtesy of the pegged currency to the US dollar and the Fed. Not rapidly or by much.

The economy is set to slow, but not precipitously.

Supply and demand forces are likely to move closer to equilibrium.

A slowdown in pace of price appreciation later in 2015 is likely.

A crash? Not likely unless some mega global/China related event rains down on the territory.

So don’t expect you are going to be picking up lots of distressed bargains in housing anytime soon.

Some fallout in retail property is on the cards for sure. I sit on the board of Hysan Development Co. Ltd. (14 HK), a major owner of top grade retail real estate in Hong Kong, so I get a bit of visibility into that sector.

There’s no doubt 2015 is going to be a tougher year for retailers.

Retail sales have been goosed up for years by masses of mainland tourists pouring into Hong Kong. That flood is waning. A slowing Chinese economy suggests a slowdown in domestic consumer spending may be on the way.

This will be a demand driven correction rather than generated by of lots of new retail supply.

Hong Kong’s retail rental index could be 10 percent lower a year from now.  Prices may be down by more.

But for those struggling to get on Hong Kong’s housing ladder… I’m afraid I don’t see it getting easier any time soon…

Good Investing,

Peter


Peter Churchouse Peter Churchouse is a widely respected analyst and commentator on financial markets with well over 3 decades residing in Asia. He spent over 15 years as Asia Strategist and Head of Research for Morgan Stanley as well as running a hedge fund. He shares his knowledge, insight and investment recommendations through his subscription publication The Churchouse Letter, along with his free newsletter Peter’s Perspective.
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