HK home prices entering bubble, says JPMorgan

Economic growth cannot catch up with asset price growth, it says in a report

(SHANGHAI) Hong Kong’s home prices may be entering a ‘bubble’ amid a battle between surging liquidity and government efforts to cool the property market, JPMorgan Chase & Co said.

Residential real estate values-to-gross domestic product has exceeded the island’s peak of 3.13 times in 1997 and may ‘overshoot’ to 3.5 times next year base on the brokerage’s forecast of a 15 per cent increase in home prices in 2011, analysts led by Lucia Kwong said in a report dated 10 Dec 2010 .

‘This shows that economic growth cannot catch up with asset price growth or liquidity is likely to channel mostly into properties and little to other segments,’ they wrote.

‘The battle between policies and liquidity will continue in the next nine to 12 months,’ they added.

Hong Kong last month intensified a yearlong battle to curb surging home prices with additional taxes and policies a day after the International Monetary Fund warned that asset inflation may derail the city’s economy.

Homes sold within six months of purchase will now incur a 15 per cent stamp duty, and down payments will increase for most mortgages, with those for homes costing at least HK$12 million (S$2 million) rising to 50 per cent from 40 per cent.

The government acted after home prices climbed more than 50 per cent since the beginning of 2009 and surpassed a 1997 peak with record-low mortgage rates and an influx of mainland Chinese buyers.

The island’s currency peg to the dollar prevents its de-facto central bank from raising interest rates.

Centaline Property Agency Ltd, the city’s biggest privately held real-estate brokerage, said housing transactions picked up after a drop following last month’s government curbs.

The company handled 53 home sales over the weekend, a 61 per cent increase from the previous week, it said in a press release on Sunday.

The unexpected measures show the government’s determination to curb rising prices, the analysts said.

‘Cash-rich investors’ who don’t rely on mortgage financing and plan to hold their properties for more than two years shouldn’t be affected, they said.

Funds from the US Federal Reserve’s plan to boost purchases of bonds may increase capital inflows and raise Hong Kong asset prices in the next six to nine months, they said.

The Hang Seng Property Index rose 1.3 per cent at the 4 pm close in Hong Kong, the most since Nov 29.

Sun Hung Kai Properties Ltd, Hong Kong’s biggest listed developer, climbed 1.5 per cent or HK$1.90 to HK$131.70, and Cheung Kong (Holdings) Ltd, controlled by Li Ka Shing, the city’s richest man, added 1.4 per cent or HK$1.60 to HK$115.90.

The property measure has fallen 3 per cent since the government’s introduced curbs on Nov 19, more than double the 1.2 per cent drop in the benchmark Hang Seng Index.

JPMorgan prefers office and shopping mall landlords to developers as retail sales during the year-end holiday season are expected to be good, helping to drive rents higher.

Hongkong Land Holdings Ltd, Hysan Development Co and Wharf Holdings Ltd are their top picks.

Grade A or prime office rents in the city’s central business district will rise about 24 per cent in 2011 because of increased demand and limited new supply, CB Richard Ellis Inc said last week.

It added that overall residential values are expected to climb 5 per cent to 10 per cent.
— Bloomberg

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