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Hong Kong Realty Takes A Needed Breather

For the last five years, Harold Leung, an executive director with a Hong Kong-based investment-management company, has wanted to buy an apartment in Hong Kong. He and his wife, Elsa, are expecting their first child in July. But he keeps getting put off by the high prices in the city.

“There needs to be a big adjustment before we can go into the market,” he said. “I think the property market is overpriced. But for the last few years, I’ve been wrong.”

A woman walks past a property agent window in Hong Kong.
Mike Clarke | AFP | Getty Images
A woman walks past a property agent window in Hong Kong.

Hong Kong’s notoriously volatile property market has emerged virtually unscathed by the credit crunch.

There was a short buying opportunity after the collapse of Lehman Brothersin September 2008, which caused prices to fall 17% in the last quarter of that year. But it closed almost as soon as it opened.

Hong Kong’s property prices shot up 31.4% last year, according to the University of Hong Kong Real Estate Index Series, and put on another 6.1% in gains for the first three months of this year. Instead of fretting about underwater mortgages and defaults, the Hong Kong government is attempting to cool the market.

The government, which controls the supply of new sites, has pledged to maintain a steady stream of plots for development. It has already taken measures to raise the minimum downpayment on homes of more than HK$20 million (US$2.6 million) to 40%, from 30%, and to increase the stamp duty on such luxury homes.

Two new sites came up for auction in May, and met with lackluster interest from developers. One site sold well below expectations, leading to lowered forecasts for the second, which still came in at the low end of those.

Now many experts expect a small correction in property prices, perhaps of 5%. “It is all about sentiment,” Buggle Lau, the chief analyst at the brokerage Midland Realty said. “During the first quarter, it was very strong, and people were panic buying.”

Even developers say it’s a positive sign that the market has taken a breather. David Tse, the managing director of L.T. Properties, a small developer that builds luxury homes in the New Territories, feels the response from the auctions was “reasonable,” and expects prospective buyers to wait and see.

“The price was jumping up like crazy,” Tse said. “Such a big increase in such a short period is not good. Now I would say it’s more healthy.”

Instead of buying, Leung and his wife have just rented a 1,500 square foot apartment in The Broadville apartment complex for HK$46,000 (US$5,900) per month. Though it’s a high rent, Leung believes it is worth it. Yields on such higher-end apartments are very low, 3% or less of the purchase price.

“If I wait for three years, 9% of the purchase price is the amount I’ll spend in rent,” Leung said. “A price adjustment of 9% or more is very likely in this time span. So I’m betting against the market.”

It was clear the market was reaching eye-popping levels.

Last October, an apartment in Henderson Land’s 39 Conduit Road development set a world record, selling for HK$439 million (US$56 million), or HK$88,000 (US$11,200) per square foot on the net area. On that basis, it replaced One Hyde Park in London as the most expensive residential real estate in the world.

The sale was controversial because the developer listed the unit as being on the 68th floor, considered a lucky number in Cantonese, when there are only 46 floors in the whole development. The Hong Kong government has since proposed new rules on the sale of uncompleted flats.

Such details seem to have done little to put off buyers in Hong Kong. The city of 7 million has seen its property in increasing demand, particularly across the border in mainland China. Rules on buying are the same for residents and non-residents alike, and there’s no capital gains tax.

According to a study put out by the Hong Kong office of Nomura International, mainland Chinese buyers accounted for 20% of all individual buyers in Hong Kong at the end of 2009, or one in five, up from 15% in September last year.

Investor Spring Cleaning - A CNBC Special Report
Investor Spring Cleaning - A CNBC Special Report

The government in mainland China has taken even tougher measures to chill its overheated property market. That may result in less “hot money” making its way into Hong Kong. It’s also become almost fashionable to warn of a coming economic collapse in China, an outcome predicted by hedge fund managers Jim Chanos and Hugh Hendry.

Hong Kong did of course have a property bubble of its own that burst in 1997, causing prices to fall some 65% through 2003. But the memory of crash is precisely what protected its housing market this time around.

Lau also says the fundamentals that have supported Hong Kong property during this credit crunch are still in place: interest rates that, with a currency that is pegged to the U.S. dollar, are at historic lows; good holding power from borrowers; decent liquidity thanks to banks that were cautious in their lending last decade; and tight supply.

The number of transactions may drop faster than prices in the next few months – Lau expects a decline of 20% — but are still at a healthy rate of 7,000 to 8,000 per month.

“Over the past few months homeowners have been very aggressive with their asking price,” Lau said. “Some buyers will make use of this opportunity to negotiate with homeowners. We are not talking about a freeze in the market.”

Prospective buyers like Leung will wait to see if there’s an opportunity on any downturn.

“That’s Hong Kong,” Tse, the developer, said. “I think the investors and Hong Kong people love it to a certain extent. That’s the game.”