30 May 2014 - Nobody can dispute that we are in a very quiet property market.  The preliminary figures released by the Rating and Valuation Dept for 2014 (available up to March as of the writing of this article) indicate roughly 3,600 residential sales per month this year – that’s roughly 50% less than the average of the last 10 years (2004-2013) and 40% less than the average during the SARS crisis in 2003!

With the low volumes we’ve seen in Hong Kong, the current prices aren’t representative of a stable demand/supply equilibrium.  This is exactly the same for stocks, or any product market – low volumes indicate unstable prices, with high volatility and a likely move in one direction or the other (in this case downward).  

Generally, extremely low volumes would indicate that a larger move is possible, but I believe the decline will be more modest.  I’ve discussed this in more detail in other posts, but essentially:

1. There is significant pent-up demand that has been waiting for a drop in prices.

2. The Chinese economy is slowing and many feel there is a property bubble, with significant excess supply of empty apartments.  However this makes Hong Kong a more attractive investment alternative for mainland Chinese investors, offsetting some of the negative effect from a China slowdown.

3. Interest rates remain low and the increases expected are moderate, fueled by a recovering global economy and increased optimism.  Only when rates become much higher will they dampen the property market in Hong Kong.

There are many other factors that affect Hong Kong’s property markets (also mentioned in prior posts).  However I feel these will not be the main drivers of the market.  As is the case with stocks, the bigger forces matter most.

Assuming there no other major shocks to the economy or new government cooling measures, I still believe the broad market will decline 10-15% but there will be support (and pockets of optimism) that prevent a major crash.  The decline will likely be on the higher end of this range in the luxury sector (which require a higher cash downpayment as a percentage of the purchase price), though exactly where support levels materialize will be seen when volumes increase.

Overall, the downward adjustment that is starting will be healthy and will stimulate more purchases (i.e. higher volumes).   This in turn will lead to prices that are more “real” or reflective of the broader market, which should give both purchasers more confidence that further large declines are less likely.