Barclays yesterday joined UBS and Bank of America in forecasting a Hong Kong property slump, predicting home prices will fall at least 30 per cent by the end of 2015 as income growth stalls and supply increases.
A “downward spiral of home prices is likely” as developers and homeowners adjust expectations, the UK bank’s analysts Paul Louie and Zita Qin wrote in a report yesterday. They assigned a “negative” rating to the Hong Kong property sector and said office prices would drop 20 per cent.
Barclays’ forecast exceeds the predictions of a series of brokerages that have downgraded Hong Kong property this month and implies the biggest plunge in prices since 1998. Hong Kong home prices more than doubled since the start of 2009 on record-low interest rates and lack of supply, prompting the government to impose extra taxes and tighten lending restrictions.
“The magnitude of the fall is underestimated,” the Barclays analysts wrote.
They are advising investors to sell eight of the 14 Hong Kong property companies they cover, including Sun Hung Kai Properties, the city’s second-biggest builder, Swire Properties, New World Development and Wharf Holdings.
Cheung Kong Holdings, controlled by Li Ka-shing, Asia’s richest man, and Hang Lung Properties, which made more than 50 per cent of its revenue outside Hong Kong in the first half, are the only two property stocks Barclays recommends investors buy.
The Hang Seng Property Index, which tracks nine of the biggest developers listed in the city, including Sun Hung Kai and Cheung Kong, has declined about 13 per cent since peaking in January.
“For prices to drop that much, you’ll need to have many bad things happening at the same time,” said Wong Leung-sing, a research director at the estate agent Centaline Property Agency, referring to Barclays’ forecast.
“Judging from buyers’ reaction to the new projects this month, we haven’t seen that kind of sentiment.”
Buyers from mainland China, which accounted for as much as a quarter of home sales in Hong Kong at the peak in the fourth quarter of 2011, fell to 8 per cent in the second quarter this year, according to Centaline.
Hong Kong imposed an extra tax on home purchases by companies and non-residents in October last year.
Developers in the first half sold 4,300 residential units, the fewest since the second half of 2008, after the government in February doubled stamp duty taxes on property transactions of more than HK$2 million (Dh947,400).
To make up for the first half’s slowing sales, developers will need to cut prices to attract buyers, according to the Barclays analysts.
Prices will come under pressure as household incomes and residential rents peak, while housing supply is set to increase, the analysts said. Hong Kong’s average household income was little changed in the second quarter, while rents are “starting to hit the income ceiling”, they said.
Hong Kong home prices last year surpassed a previous peak in 1997 and are now the world’s highest, according to the estate agent Savills, after having more than doubled since 2009.
They have fallen about 2.7 per cent since rising to a record in March, according to an index compiled by Centaline.
The city’s last major home-price crash started in October 1997 and lasted six years. Prices fell almost 50 per cent in the next 12 months. They declined more than 60 per cent to a trough in 2003 and have more than tripled since then.
Raymond Ngai of Bank of America’s Merrill Lynch unit and UBS’s Eva Lee are among analysts who over the past month have forecast home prices in the city will drop as much as 25 per cent as demand wanes because of government curbs and the expectation of rising interest rates.
Total residential transactions in the first half fell to the lowest since 1996, according to data available on the Land Registry’s website.