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Volatility in HK Property Market to Ease; Price Rise Limited

Hong Kong’s property market is set to stabilize following a volatile 2011, with home prices projected to rise 10 percent this year, a moderate increase compared to the huge gains seen in 2009 and 2010, industry watchers tell CNBC.

Hong Kong skyline
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Last year, the sector was characterized by price swings – with home prices accelerating 13 percent in the first-half, but falling 5 percent in the second-half on growing fears over a global economic slowdown and the euro zone debt concerns. Price declines in the second half of the year meant that average home prices grew 8 percent over 2011, according to Nomura research.

“We forecast Hong Kong prices will go up 10 percent in 2012, and 7 percent in 2013…in a normal setting, this is not considered bullish,” said Paul Louie, Nomura’s Regional Head of Property Research, Asia Ex-Japan, pointing to the rapid price increases of 29 and 21 percent in 2009 and 2010, respectively.

Supply-demand fundamentals in the property market will continue to support prices, with around 11,000 units, half the historical average, expected to come on board for each of the next 4 years. “We continue to see that for the next three to four years, the housing supply and demand situation remains favorable,” Louie said.

However, analysts say recent government measures to limit speculative activity in the market, including the hike in stamp duty fees, and general caution amongst investors stemming from uncertainty in the global economy will limit excessive price gains.

“Those (cooling) measures have worked, there was a dramatic pull back in the volume of transactions in the second-half of last year. From the June peak to January, transaction volumes fell by 50 percent,” said Peter Churchouse, Chairman of property investment firm Portwood Capital, who agrees prices could rise around 10 percent this year.

He adds that if property prices were to rise 10-15 percent on top of the 6.7 percent year-to-date gains, it could trigger further property tightening measures.

Louie agrees that further cooling measures are on the cards in the form of the government extending the holding period of the Special Stamp Duty from two to three years, which places a tax of as much as 15 percent on the quick resale of homes.

“The Hong Kong government may further extend the Special Stamp Duty’s holding period from the current two years to perhaps 2.5 or three years,” he said.

Another factor that will lead to the stabilization of property prices this year, according to the CEOs of Hong Kong-based real estate developers Swire Pacific and Hang Lung Properties, is additional land supply that is expected to come on board once the new Chief Executive Leung Chun-ying takes office on July 1.

“I think Mr Leung will release land as needed and hence the market will be a more stable place, which is, overall, good for Hong Kong,” Ronnie Chan, CEO of Hang Lung Properties, told CNBC Asia’s "Squawk Box".

“The problem of Hong Kong's property prices over the last 10 years, almost, is that there was no supply of land. So when you don’t have land, prices go up, and that's the bane of much of Hong Kong's social problems,” he added.

In his election campaign, Leung pledged to ease a housing shortage by increasing land supply, particularly near mainland China. With a land area of 1,104 square kilometers, of which three-quarters are countryside, land supply in Hong Kong is extremely limited and strictly controlled by the government.

Martin Cubbon, CEO of Swire Properties agrees, and is optimistic that the incoming Chief Executive will manage excessive price rises in the real estate market.

“It’s quite right that the administration looks at providing more affordable housing in the public sector. They have announced more land sales to the private sector too, so both segments of the market place are going to get more supply over the course of the next few years. It is welcome and frankly overdue,” Cubbon told CNBC Asia’s "Squawk Box".