Are the Boom Days for Hong Kong Property Over?

Hong Kong’s residential property market, which has seen dramatic price gains over the past decade because supply has not kept up with demand, is set for a slowdown as the new administration comes good on its pledge to increase land supply for housing, says an industry expert.

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“With a pro-supply government and hence likely rising supply, and more proactive policies against price rises, we expect residential price growth to halve at best,” Nicole Wong, Regional Head of Property Research at CLSA told CNBC.

In his inaugural speech on July 1, Chief Executive C.Y. Leung reiterated his pledge to increase land supply to ensure affordability for middle-income buyers. The government’s target is to help private developers release for sale 20,000 units every year – almost double of the 9,500 units made available in 2011.

Residential property prices, which have surged 66 percent between 2000 and 2012 at an annual rate of 5.2 percent, will slow to a 2.6 percent growth rate per annum between 2010 and 2020, according to Wong.

“I think the pressure on property prices is going to hit the property market much earlier than people would have expected,” Wong said, adding that she is underweight Hong Kong property developers as she believes earnings have peaked.

Policy risks surrounding the sector, along with a general rise in investor risk aversion, sent Hong Kong property stocks down 2 percent in the second quarter – after rising 19 percent in the first quarter.

Some developers in the city have already started pricing their housing projects at a discount. Cheung Kong Holdings, for example, priced units at a new project located in the city’s suburbs 5 percent below apartment prices in the same district.

“Future land is not going to be pricier, it is going to be a little cheaper - so (Cheung Kong is) offloading the flats and recouping the cash (to) buy lower,” Wong said, a trend that is likely to continue among other developers.

Paul Louie, property analyst at Nomura, however, disagrees that government’s policies to increase supply will have a large impact on prices in the coming years.

“Even though there will be an increase in land supply, the transmission mechanism takes four years. It takes at least four years in order to complete the constructions before they can be moved into,” he said.

Louie adds that there is adequate demand to meet an increase in supply, which will ensure that prices remain supported.

“The physical market has been fine year-to-date – most of the projects that have been launched have been clearing units at a decent pace,” he said.