HK home sales may fall on inflation worries

July 31, 2008
HK home sales may fall on inflation worries
Share slide, global credit crunch could push property prices down,
say analysts

(HONG KONG) Hong Kong's apartment transactions may fall to a 10-month
low in July, then drop further, on concerns that accelerating
inflation and a slumping stock market may push prices down, analysts
said.

Transactions in 10 of Hong Kong's biggest housing complexes, used by
many analysts as a benchmark, fell to 27 last week from 33 the
previous week, Centaline Property Agency said. Total home sales in
the city may drop to 6,100 in July, the lowest number since
September, from 7,167 in June, it said.

'This will probably continue for the whole of the third quarter,'
said Louis Chan, managing director of residential properties at
Centaline. 'We're looking at between a 3 and 5 per cent correction in
prices within the quarter.'

Home values have tracked Hong Kong's economy, peaking in the second
quarter of 1997, then crashing in the Asian financial crisis, leaving
many homes worth less than their mortgages for years. The 2000 dotcom
bubble burst, the Sept 11, 2001, terrorist attacks and the 2003 Sars
epidemic caused prices to fall as much as 70 per cent from the peak.
The rebound started in late 2003 and prices doubled in the past four
years.

Now, the benchmark Hang Seng Index has fallen almost a third from its
record in October as credit-market losses climbed worldwide,
threatening global economic growth even as inflation accelerates in
Hong Kong. The combination could deter potential homebuyers, possibly
for the balance of the year.

'The Hong Kong residential market will go into a quiet period for the
rest of 2008,' said Cusson Leung, a Hong Kong-based analyst at Credit
Suisse. His July 8 report forecast a 5 to 10 per cent reduction in
home prices in the second half.

Overall housing transactions in the second half may fall between 20
and 30 per cent from a year earlier, said Patrick Chow, head of
research at real estate agency Ricacorp Properties. 'Many people
looking to upgrade their properties again have had their capital
drained by the stock market,' Mr Chow said. 'This may seriously
impact the high-end market, in part because many of those homebuyers
had upgraded last year.'

Hong Kong's four biggest real estate agencies this month fired a
total of more than 300 workers in anticipation of a housing slump,
according to a July 23 report in the Hong Kong Economic Times.

Hong Kong's inflation accelerated in June to the fastest pace in four
months as food and energy costs climbed. Local lenders including BOC
Hong Kong (Holdings) and Hang Seng Bank last month raised their
mortgage rates for some customers to deflect the squeeze on lending
margins.

'Inflation is giving many people second thoughts about buying
properties,' said Alnwick Chan, a Hong Kong-based executive director
at property research company Knight Frank LLP. 'There's going to be a
correction but it won't be a crash.' Hong Kong has the most expensive
luxury home prices in Asia, US$10,490 to US$14,780 per square metre,
according to the Global Property Guide website. That compares with
US$12,510 to US$22,923 per square metre in Manhattan.

The Hang Seng Properties Index, which tracks the city's six biggest
builders by market value, has dropped 30 per cent this year on
concerns Hong Kong banks may lift rates.

The expectation that the US Federal Reserve will start raising
interest rates in the fourth quarter of this year has damped Asia's
stock markets, according to Credit Suisse.

Sino Land sold almost 70 per cent of the apartments it made available
at the Palazzo, a high-end complex overlooking the Sha Tin horse
track in the first nine days of sales, Sing Tao Daily reported in
May. Billionaire Li Ka-shing's Cheung Kong (Holdings), Hong Kong's
second-biggest builder by value, met full-year sales targets by June,
selling 2,700 apartments for HK$23 billion.

Transactions and prices may rebound in the fourth quarter if both the
US and Hong Kong stock markets show they have weathered the sub-prime
crisis, Centaline's Mr Chan said.

The property affordability ratio, homeowners' average monthly
mortgage payment as a percentage of income, is 32 per cent, 'a very
healthy level' compared with 93 per cent at the peak of the 1990s
boom, according to Buggle Lau, chief analyst at Midland Holdings Ltd,
Hong Kong's biggest publicly traded property agency.

'Growth is definitely slowing, but the fundamentals of the economy
are still strong,' Mr Lau said. 'When the uncertainties go away we're
pretty sure buyers are going to come back.' Midland's shares have
plunged 66 per cent this year, after nearly quadrupling between t