Hong Kong home prices to drop, says Barclays

Barclays plc joined UBS AG and Bank of America Corp in forecasting a Hong Kong property slump, predicting home prices will fall at least 30% by the end of 2015 as income growth stalls and supply increases.

A “downward spiral of home prices is likely” as developers and homeowners adjust expectations, analysts Paul Louie and Zita Qin wrote in a report yesterday. They assigned a “negative” rating to the Hong Kong property sector and said office prices will drop 20%.

Barclays’s forecast exceeds the predictions of a series of brokerages that have downgraded Hong Kong property this month and implies the biggest plunge in prices since 1998. Hong Kong home prices more than doubled since the start of 2009 on record low interest rates and lack of supply, prompting the government to impose extra taxes and tighten lending restrictions.

“The magnitude of the fall is underestimated,” the Barclays analysts wrote.

The analysts are advising investors to sell eight of the 14 Hong Kong property companies they cover, including Sun Hung Kai Properties Ltd, the city’s second biggest builder, Swire Properties Ltd, New World Development Ltd and Wharf Holdings Ltd.

Cheung Kong Holdings Ltd, controlled by Li Ka-shing, Asia’s richest man, and Hang Lung Properties Ltd, which made more than 50% of its revenue outside Hong Kong in the first half, are the only two property stocks Barclays recommends investors buy.

The Hang Seng Property Index, which tracks nine of the biggest developers listed in the city, including Sun Hung Kai and Cheung Kong, has declined about 14% since peaking in January. It rose 0.5% as of 2:12pm local time.

“For prices to drop that much, you’ll need to have many bad things happening at the same time,” said Wong Leung-sing, a research director at realtor Centaline Property Agency Ltd, referring to Barclays’s forecast. “Judging from buyers’ reaction to the new projects this month, we haven’t seen that kind of sentiment.”

A new project developed by New World and Wheelock & Co in the Kowloon West area, on Oct 26 sold all 185 units within seven hours after they were put on the market, Sing Tao Daily reported yesterday, citing the developers. The units were sold at average prices of HK$22,000 (RM8,908) to HK$24,000 per sq ft, the report said.

New World is still seeing “strong demand” from homebuyers and has no plans to cut prices at its projects significantly this year, executive director Adrian Cheng said in an interview on Oct 21.

Buyers from mainland China, who accounted for as much as a quarter of home sales in Hong Kong at the peak in the fourth quarter of 2011, fell to 8% in the second quarter this year, according to Centaline. Hong Kong imposed an extra tax on home purchases by companies and non-residents in October 2012.

Developers in the first half sold 4,300 residential units, the fewest since the second half of 2008, after the government in February doubled stamp duty taxes on property transactions over HK$2 million.

To make up for the first half’s slowing sales, developers will need to cut prices to attract buyers, according to the Barclays analysts.

Prices will come under pressure as household incomes and residential rents peak, while housing supply is set to increase, the analysts said. Hong Kong’s average household income was little changed in the second quarter, while rents are “starting to hit the income ceiling”, they said. — Bloomberg

Swedish Banks Lash Out at Government as Housing Overheats

Sweden’s banks, which are among Europe’s best capitalised, are warning that excess reserves can’t cool a property market at risk of overheating, as they urge the government to address a chronic under-supply of housing.

“Just to increase capital ratios is the wrong tool,” Nordea Bank AB CEO Christian Clausen said on Wednesday in an interview in Stockholm. 

“If you have too little construction of new homes and you have too much demand, then there is an imbalance, and that has nothing to do with credit supply.”

Swedish regulators have taken a number of steps to try to stem growth in household borrowing and to cool house prices amid concern a bubble is developing. Measures have included capping mortgages at 85% of property values and tripling risk weights on banks’ mortgage assets. 

While the mortgage cap helped slow loan growth, borrowing has started to accelerate again and house prices are still climbing. That’s left Swedes with a record debt load equivalent of more than 170% of their disposable incomes.

Apartment prices, which have more than doubled since 2000, increased 14% in the 12 months to August, according to Svensk Maeklarstatistik, which publishes monthly data on Swedish real estate. The price of single-family houses had risen 4% since August last year, it said. 

State-owned mortgage bank SBAB warned on Oct 18 that prices are likely to continue rising and that there was a risk of overheating.

The government’s response has been to blame the banks. Finance Minister Anders Borg has repeatedly threatened to raise capital requirements again next year to cool the housing market. 

Borg has also expressed a preference for addressing housing market imbalances by forcing banks to hold bigger buffers rather than by asking households to amortise their debt, as proposed by the financial regulator. 

Borg said last month that a mortgage amortisation requirement isn’t high on the agenda for the coming year and that there are “more natural” ways to curb household debt. This month, he ruled out limiting homeowners’ access to tax deductions on interest rates.

Michael Wolf, the CEO of Sweden’s biggest mortgage lender Swedbank AB, on Oct 22 called on the government to address imbalances in the housing market by increasing the supply of housing. He said the approach would be more effective than raising capital requirements.

“We want to help our customers buy a home and will gladly provide financing for new construction,” Wolf said in the bank’s third quarter report. 

“But we are not willing to take part when the same properties are mortgaged at ever increasing levels. The increased capital requirements on banks are not an optimal way to provide a solution to Sweden’s problem of too little housing, which damps potential growth.”

Sweden’s rising house prices stem in part from a lack of rental properties in its biggest cities after about 160,000 properties across the country were converted into owner-occupied flats since 2000, according to data from Statistics Sweden. 

Construction is also failing to keep up with population growth. While greater Stockholm added 164,400 residents in the past five years, only 4,165 housing units were built in the Stockholm area in the first half of 2013.

The government introduced a mortgage cap in October 2010 that helped slow credit growth to a 20-year low of 4.5% last year, from a pace of more than 10% in the five years to 2008. Yet, the pace of borrowing has started to accelerate again. Lending to households rose 4.8% in August compared with 4.7% in June and 4.6% in April. — Bloomberg