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As debate continues to flare over the necessity of government intervention to cool the market through building more residential units, another solution is a more regular land auction schedule combined with a more transparent bidding system to achieve a stabilised and healthy property market, according to Jones Lang LaSalle.
The recent rebound in the residential property market has seen mass and luxury property prices rise 22% and 32% respectively since the dip in 4Q2008 during the financial crisis. As to whether a bubble has emerged, the market is overheated and whether intervention is required, a close look at the different indicators including sub-sale activities, stock turnover level as well as current affordability can shed better light over the recent controversies.
Are we seeing bubbles in the property market?The current sub-sale activities ratio, i.e. the number of sub-sale activities over the total number of residential sales and purchase activities, is standing at 2%. Compared to the high sub-sale levels of 10-20% once registered in 1997 and 5% during the post-SARS period in 2004/05, the market is much less speculative today than during those previous cycles. This low sub-sale ratio indicates that people are actually buying properties for self-occupation or for long-term investment rather than engaging in a high level of speculative activities which may help create bubbles.
A similar trend has been observed in stock turnover. If we look at how much private residential stock is transacted in a year, we will see that the numbers will likely reach about 12% this year. Compared to the level of 14-18% in 1996/97 when the market was really hot with strong speculative activities, the current stock turnover ratio is in fact still healthy.
(*) estimated number
On the other hand, the affordability ratio is also a critical indicator of whether residential prices are at reasonable levels. The affordability ratio today stands at about 40%, which is comparatively healthy compared to the peak period in 1997 when the ratio reached over 90%, and still below the 45%-level recently achieved in the post-SARS period of 2004/05.
“The current affordability ratio is in fact rather healthy, which means that the real burden for mortgage is still within a reasonable range. And even if interest rates are going to trend up, which is not likely to happen until 2H2010, there will unlikely be heavy pressure on immediate price correction,” said Joseph Tsang, International Director and Head of Residential, Jones Lang LaSalle.
“With all the key ratios holding at a healthy level, the diagnosis that we are having a property market bubble is not exactly valid. The market upsurge should be seen as part of a natural recovery cycle rather than an unhealthy, overheated expansion. The upward pressure on property prices is in fact partly due to the tight supply in development sites which results in a reduced number of new completions in recent years. The ultra-low interest rate environment together with the flood in global liquidity also helped push investment demand and property price higher.”
Government intervention – a boost or blight for the market?
With property prices surging, the market has different views and suggestions on how to stabilise the market. Banks have reduced their loan-to-value ratio for new lending from 70% to 60% for properties priced at HK$20 million or above. Such measures will restrict potential up-graders from trading upward for larger homes as the required amount of down payment has increased. This will also create frictions in the “demand chain” - as potential up-graders become trapped in their current medium sized units, stock for such units available in the secondary market will be reduced, pushing prices in mass and medium segments even higher. Instead, it is worth considering imposing such new loan ratio only to more expensive properties.
There have also been calls for government intervention through re-launching of the Home Ownership Scheme (HOS). However, the scheme will not meet the needs of middle-class income groups who would not be eligible according to the strict application criteria. Other suggestions include adding more restrictive terms in lease conditions to control the supply of units and restricting home buyers for new flats to Hong Kong residents only. However, all these ideas would only lead to a “controlled market”, thereby interrupting the “market-driven” mechanism and indirectly taking away Hong Kong’s intangible asset of being one of the freest economy in the world.
There are in fact, more effective ways to help adjust the market, and this should be done in the upper stream. “Indeed, the government may intervene and help develop a healthier market by providing a steady supply of development sites. This can be achieved by resuming regular land auctions particularly for the smaller plots of land. Equally important, the government may improve the transparency of the land application system by disclosing the unsuccessful bids for sites. Given such pricing benchmark, developers are in a better position to adjust their offers and the market would ultimately see more successful land sale triggers,” said Joseph Tsang.
“We believe that the market should largely follow a ‘market-driven’ mechanism and sales prices of residential units should be determined by market demand. Government intervention is seen as a less preferred option in Hong Kong’s context. However, it is perhaps time for the government to make way for a more efficient and transparent property market by fine tuning its land supply system. A stable and sustainable property market is crucial for Hong Kong’s long-term economic success. Too much government intervention will only disadvantage Hong Kong’s position as one of the world’s freest economies, but a fairer and more efficient and transparent property market will help strengthen the city’s investment environment in the long run.” concluded Joseph Tsang.
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