Greater China Weekly Insight / 2 Apr 2013 / 2 of 13
HONG KONG’S REAL ESTATE: HEADING TOWARDS A PERFECT STORM?
Hong Kong’s property prices surpassed the 1997 peak during the second half of 2012. Despite a slew of policymeasures, prices have remained elevated without any apparent sign of declining. Historically, an overheatingproperty sector can result in a significant downturn for an economy. Therefore, we need to evaluate the currentsituation carefully.
IS HONG KONG’S PROPERTY A BUBBLE?
From whatever angle, Hong Kong’s property prices have risen too fast. Even though the economy has onlyexpanded by 1.4%, the residential real estate prices have increased by 23% over the last 12 months. As westated in our previous analysis (ANZ Greater China Insight 11 October 2011), the appreciation of RMB could bea factor behind Hong Kong’s property bubble. However, RMB has only appreciated by a modest 1.1% againstHKD in the last 12 months. The surge in real estate prices in all districts in the past few years suggest thatHong Kong’s property is a bubble.
Hong Kong - Property Prices
Centa-City Leading Index - RawCCLI - Adjusted for HKDCNY
Hong Kong - Property Price Rebound by Region
Peak/SouthKowloon Tong/Shek KipMid-LevelsNorth Point/Quarry BaySai Kung/Tseung Kwan OCauseway Bay/Happy Tsim Sha Tsui/Yau Ma TeiHung Hom/To Kwa WanShau Kei Wan/Chai WanHo Man Tin/ PrinceWest/Sheung Wan/CentralCheung Sha Wan/Shum Tai Po Tsuen WanAberdeen/Ap Lei ChauIsland/Discovery BayKwun TongShatinNorthMongkok/Tai Kok TsuiWanchai Yuen Long/Tin Shui WaiWong Tai Sin/Diamond Hill Tuen Mun
Price per sq ft, Mar 2009 (HKD)Increment From Mar 2009 toOct 2012
Sources: Bloomberg, Centaline, ANZ
To assess how significant the overvaluation is, we have constructed an econometric model to estimate the fairvalue of Hong Kong’s residential property based on a set of variables that have been well established inprevious research (see ANZ Greater China Weekly Insight 25 Oct 2011, IMF (2011) and Leung et al (HKMA2008)). Our estimates are in line with other similar studies in terms of signs and magnitudes of the parameters(see Annex on page 5). Real interest rates, macroeconomic performance (Hang Seng Index as a proxy) andconstruction costs are statistically significant factors driving Hong Kong’s property prices. Our model calculatesthat Hong Kong property prices in 2012Q4 are 24% higher fair value suggesting that there is room for acorrection.
Hong Kong - Real Property Price IndexActual vs. Fair Values
(Jul 97 = 100, CPI adjusted)
20304050607080901001101201994 1997 2000 2003 2006 2009 2012Actual Fair Value
Hong Kong - Property Price Quarterly Movementby %, 1992Q1-2012Q3
Drop16-20%Drop11-15%Drop 5-10%Drop 0-5%Rise 0-5%Rise 6-10%Rise 11-15%Rise 16-20%051015202530
No. of Quarters Average Actual-Fair Value Gap, % (RHS)
Sources: CEIC, ANZ Research
Historically, a widening gap between the actual price and fair value increases the risk of a significant pricecorrection. Typical cases are the period of 1997Q4 that ended with a downturn. In fact, between 1992Q2 and2012Q4, three quarters (1997Q4, 1998Q2, 2008Q4) registered quarterly declines in real property prices of more than 16%. Prior to these declines, we saw a substantial gap between fair value and actual prices. In