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ANZ Greater China Weekly Insight 2 April 2013

ANZ Greater China Weekly Insight 2 April 2013

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GREATER CHINA ECONOMICSANZ RESEARCHWEEKLY INSIGHT
FEATURE NOTE
2 APRIL 2013INSIDEFeature Note 2Data Preview 6Week in Review 7China Liquidity Report 8Momentum BarometerForecasts 1Important Notice 12CONTRIBUTORS
Li-Gang Liu
Chief Economist, Greater ChinaLiGang.Liu@anz.com
Raymond Yeung
Senior EconomistRaymond.Yeung@anz.com
Hao Zhou
Economist, China EconomicsHao.Zhou2@anz.com
Louis Lam
Economist, Greater ChinaLouis.Lam@anz.com
RESEARCH@ANZ.COM91
HONG KONG REAL ESTATE: HEADING TOWARDS A PERFECT STORM?
 
In the past 12 months, Hong Kong’s residential property prices haverisen by more than one-fifth despite a series of government tighteningmeasures. While demographic changes and mainland investment haveoffered new sources of housing demand, low interest rates and tightsupply are still the key factors behind the elevated price level.
 
We believe Hong Kong’s property sector is a bubble. Our empirical modelindicates current average prices are 24% above fair value. A wideninggap between the two will likely trigger a fall of real estate prices.
 
In our view, the strategy of massive land supply and the commitment tobuild more affordable housing may risk Hong Kong repeating thedisastrous situation that occurred in 1997-2003 as poor and irreversiblelocal policy actions in a changing global environment could exaggeratethe pace of market correction. Therefore, we need to consider the newhousing strategy very carefully.
DATA PREVIEWTaiwan:
We expect Taiwan's inflation to increase mildly while exports shouldsustain its moderate growth path over the first two months.
China:
We believe inflation will moderate significantly in March after theChinese New Year.
 WEEK IN REVIEWTaiwan:
The central bank held its policy rate unchanged, as widely expected.
China:
The official PMI rebounded in March, suggesting that growthmomentum has been stabilizing, but headwinds remain.
CHINA MARKET LIQUIDITY REPORT
The PBOC drained liquidity from the open market last week, but marketliquidity appeared plentiful even before the end of the quarter, largely due tostrong capital inflows.
CHART OF THE WEEKChina’s March official PMI dispelled growth concerns
China - Official PMI
45474951535557596163Dec09Mar10Jun10Sep10Dec10Mar11Jun11Sep11Dec11Mar12Jun12Sep12Dec12Mar13Headline PMI New Orders New Export Orders
 
Sources: CEIC 
 
Greater China Weekly Insight / 2 Apr 2013 / 2 of 13
FEATURE NOTE
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
020406080100120140199619982000200220042006200820102012
Centa-City Leading Index - RawCCLI - Adjusted for HKDCNY
Hong Kong - Property Price Rebound by Region
05,00010,00015,00020,000
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
27.317.28.58.310.98.88.17.8
051015202530
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
 
Greater China Weekly Insight / 2 Apr 2013 / 3 of 13
FEATURE NOTE
another regression analysis that tracks short-term dynamics, we find that a widening of the gap between actualand fair values would trigger price declines. Therefore, we believe that Hong Kong property prices are now atrisk.
WHAT ARE THE CAUSES BEHIND THE ELEVATED PRICES?
Undoubtedly, rising property prices since 2009 are largely driven by the negative real interest rate regime onthe back of US monetary easing. At this stage, Hong Kong’s mortgage interest rates are priced at around 2%,and the low interest environment supports a large buy-rent gap for people who will need a property for self-occupancy as the interest portion of the monthly mortgage instalment is significantly below the monthly rentalpayment. This offers a solid and valid proposition for property buyers.
Hong Kong - Mortgage Interest to Rental Ratio
02040608010012020052006200720082009201020112012
Hong KongKowloonNewTerritories
Below 100 means the interestexpense for a 50sq m flat with30% down is cheaper thanrenting the same flat.
Hong Kong - New Property Supply
(Units)
010,00020,00030,00040,00050,00060,000200120032005200720092011
020406080100120
New Flat Available for sales15-year Average SalesProperty Price Index (RHS)
Sources: CEIC, Centaline, ANZ
This low interest regime has been further exacerbated by the problem of below-average supply in recent years.On average, there have been 18,419 units of new flats available for sale over the last 15 years. However, therewere just 14,000 new flats available for sale in 2012. This is also a level below the average turnover of 19,000 ayear. Since 2007, we have seen a shortage in some years alongside the rise of property prices.Indeed, genuine housing demand needs such as marriage and expansion in family size also put pressures onhousing prices. In addition, wealth and economic well-being, plus an appreciating RMB have seen theemergence of this new group of investors in Hong Kong’s property market in the past few years. As Chinacontinues to liberalise its capital account and will promote cross border investment, demand from Mainlandbuyers are also an important factor driving up Hong Kong’s property price.
Hong Kong - Birth, Death, Marriage, Divorce
(per 1000 persons)
024681012141992199419961998200020022004200620082010012345678
Death RateBirth Rate1st Marriage (RHS)Divorce (RHS)
Hong Kong: Estimated Mainlanders' PropertyPurchase in the Luxury Sector (>HK$12m)
051015202530352007H12008H12009H12010H12011H1Mainlanders' Transaction as % of total% of transaction value
 
Sources: CEIC, ANZ
DIFFERENCE FROM THE 1997 BUBBLE: NEW GOVERNMENT POLICY
Over the past 12 months, the government and Hong Kong Monetary Authority (HKMA) have repeatedlyheightened the intensity of their demand-side and supply-side measures:
Stamp duties
: In October 2012, the Government raised Special Stamp Duties (SSD) by another 5 ppts andintroduced a new Buyer’s Stamp Duty (BSD) of 15% on non-permanent Hong Kong residents (seeANZ GreaterChina Weekly Insight6 Nov 2012 for our analysis). In February 2013, it raised the stamp duty. For propertiesbuyers who already own property, the stamp duty for property under HKD2m became 1.5% of the transaction

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