With the fear of an oncoming worldwide recession overhanging, Knight Frank and Holdways remain cautious towards the outlook for both Mainland China and Hong Kong's residential markets. Residential transaction volume in both markets is expected to stay low in 2012, which prices could face mild corrections.
Mr Thomas Lam Ho Man, Head of Research at Knight Frank in Greater China, says “the external economic factors and interest rates determine the performance of the Hong Kong property market. While the economic outlook remains unclear, mass home prices are likely to drop 10–15% in 2012. Luxury residential properties, meanwhile, are likely to outperform amid limited supply, with prices expected to decline up to 10% in 2012. Moreover, the increasing interest rate will further hit the residential market. If mortgage rate increased to 300bsp and home prices decrease by 10%, the affordability ratio will rise to 74 from the current 58.”
Chart 1: Hong Kong residential sales volume and prices
Ms Helen Liu, General Manager of Beijing Holdways Information & Technology Co Ltd says, “the Mainland residential market has entered a consolidation period. The first tier markets are showing signs of larger price adjustments over the past months, and we expect this will spread to the second tier cities. With the Central government’s determination to curb the property market, we expect transaction volumes to drop further in the coming year. However, since the property market can greatly affect the financial system and economy, a property market slump is unlikely to happen, given the close ties between local governments and the property market. Price corrections are expected to remain mild in the near future, with the government possibly reviewing and, to some extent, loosening some tightening measures if prices go down by 20- 30% next year.”
Chart 2: Residential prices and changes in ten major cities
Thomas Lam further comments, “the financial situation of developers in China’s property market has a different scene compared to Hong Kong. Here, we believe that the good result of new home launches, the low debt and the inflow of ‘hot money’ have shown the financial stability of developers. On the opposite, high debt-to-equity ratio, sluggish sales and cash flow shortage will further increase funding pressure on Mainland developers, which will cause more developers to cut prices in order to promote sales. There will be a cold hard winter for some developers.”