Bird's-eye view of highrise buildings on Hong Kong island. The end result of the removal of liquidity is likely to be a property price correction, said analysts. Mike Clarke / AFP

Barclays report warns that price rally since 2007 is on its last legs

Home prices in the city could drop as much as 30 percent by 2013 as rising mortgage rates will weigh on sentiment, Barclays Capital said in its latest research report.

"The debt-fuelled property price rally since mid-2007 is entering its last leg as rising mortgage rates signal a reduction in affordability and purchasing power," property analysts at Barclays Capital led by Andrew Lawrence, said in the report released on Friday.

"The end result of the removal of this liquidity is likely to be a property price correction, reflecting our belief that property markets top out soon after liquidity has been most abundant," they concluded.

The low cost and availability of abundant mortgage debts have driven a 72 percent climb in property prices since mid-2007.

"While we do not expect a near-term correction, rising mortgage rates hold the potential for a price correction into 2012, driven by reduced affordability and purchasing power for new buyers, leading to negative sentiment among investors."

Based on Barclays Capital's forecast that mortgage rates will reach 4-4.5 percent by end 2012 from as low as around 1.0 percent currently, "we consider a 25-30 percent price correction an increasing likelihood for the housing market," the analysts said.

Home prices in the city fell 0.75 percent in the week ended March 27, the first weekly decline in two months, Centaline Property Agency Ltd, one of the major real estate broker agencies in the city and the compiler of the popular property price index - Centa-City Leading Index - said on Friday.

The Centa-City Leading Index, an indicator of housing prices in the city, declined to 97.41, the company said.

The weekly decline came after leading mortgage providers including Bank of China Hong Kong and Standard Chartered raised their interest rates last month.

The low supply in the market will likely hold prices up initially as turnover volumes fall. However, into 2012 higher mortgage rates and US Federal Reserve rate increases are expected to start feeding into price reductions. As a result, prices in the mass market may correct 15-20 percent next year and a further 10 percent in 2013 after posting a 10-15 percent rise this year, the analysts reckoned.

They had previously forecast a 10-15 percent price rise in 2012 and 0 percent in 2013.

However, Patrick Chow, head of research at Ricacorp Properties, raised doubts about the forecast extent of the correction.

"First of all, I doubt interest rates will climb at such a fast pace," he told China Daily, noting that the US economy is still sluggish, preventing the Federal Reserve from rapidly tightening its monetary policies.

The Hong Kong Monetary Authority - the city's de facto central bank - conducts its rate actions in step with the US Fed due to the Hong Kong dollar's peg with the US dollar.

"If the interest rates do climb to that level (as forecast by Barclays) in a short period of merely more than a year, the economic fundamentals must be very strong, which will be supportive to the real estate market," he reasoned.

"In the worst scenario, home prices will correct no more than 10 percent unless fundamentals deteriorate", Chow added.

William Leung, executive director and head of personal banking at Hang Seng Bank- the third-largest mortgage lender in the city - said on Thursday the Hibor-based mortgage rate is expected to hit a high of Hibor plus 1.5 percent in the next six months. The highest Hibor-linked mortgage rate offered by lenders now is Hibor plus 1.2 percent. The one-year Hibor is now at 0.65 percent.

China Daily

(HK Edition 04/02/2011 page2)