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U.S. rate increases have tamed inflation at home but caused pain elsewhere

Tue, Aug 8, 2023 10:23amGrey Clock 4 min

Hong Kong’s notoriously expensive property market is often seen as a barometer of the city’s economy. It isn’t looking good.

Home prices are down. Office vacancy rates have hit a record high. Commercial real-estate investment has plummeted. The shares of some big developers in the city are trading at a 30-year low to their net asset value, a measure of financial health, according to research by analysts at JPMorgan.

A key reason is high interest rates, which have increased the burden on mortgage-paying home buyers, said Cathie Chung, senior director of research at Jones Lang LaSalle, a real-estate services company. The Hong Kong dollar’s peg to the U.S. dollar forces monetary authorities in the city to track U.S. interest-rate decisions, limiting their ability to stimulate the property sector and the wider economy.

The Federal Reserve has embarked on a historic cycle of interest-rate rises since last March, raising the benchmark federal-funds rate from around zero to 5.25% to 5.50%. The Hong Kong Monetary Authority, the city’s de facto central bank, has followed these hikes, increasing its base rate to 5.75% from 0.75% over the same period.

The full impact of higher interest rates in the city still hasn’t been felt, said Asif Ghafoor, chief executive of online real-estate marketplace Spacious. Asking prices of residential properties listed on the platform have fallen 5% since the start of the year. Sales prices tend to follow suit, and are likely to fall 5% to 10% in the next six months, he said.

To prop up the market, the HKMA relaxed mortgage rules in early July for the first time since 2009, allowing home buyers to pay less upfront and borrow more for some properties if they plan to live in them. But those working in the sector think the pain is far from over.

“We expect that the recovery will be slow and long,” said Chung at Jones Lang LaSalle.

The slump in the property market has hurt the share prices of developers, a major source of wealth for some of the city’s richest families. CK Asset Holdings, Henderson Land Development, Sun Hung Kai Properties and New World Development—all still partly owned by the families of the founders—are performing much worse than the wider stock market this year. New World and Henderson Land have lost more than 15% this year, according to FactSet data.

Hong Kong is one of the world’s leading financial centres and is seen by many foreign businesses as a gateway to mainland China. It is now being hit by a slowdown in investment-banking activity—with several large banks cutting staff this year—and the shaky recovery of China’s economy, which has undermined confidence among businesses and potential home buyers in Hong Kong.

The overall vacancy rate for offices reached a record high of 15.7% in the first half of this year, compared with an average of under 5% in 2018, according to figures by CBRE. In the central business district, there was almost eight times as much empty office space as in 2018, when the area had a vacancy rate of just 1.3%.

The equivalent of $603 million was invested in commercial real estate between April and June, according to CBRE data, just a third of the first-quarter tally and the lowest quarterly figure since the end of 2008, when the global financial crisis caused a huge drop in confidence.

Hong Kong’s border with mainland China was reopened earlier this year, but companies from the mainland haven’t grabbed office space in the numbers many had hoped, said Ada Fung, head of office services at CBRE Hong Kong. Flexible working arrangements and geopolitical tensions that have made many companies pause expansion plans are also crimping demand, she said.

The drop in demand is being exacerbated by a supply glut. Developers bought land and started constructing a number of new buildings before 2019, when widespread protests rocked the city and only ended with the passing of a strict national-security law. Demand for commercial property after that was soon undermined by the spread of Covid-19.

This shift in supply and demand is finally giving potential renters the upper hand, said Fung. “It could be a healthy reset,” she said.

There are some reasons for optimism. Retail businesses have increased their demand for commercial property after the reopening of the border with China, which has brought in tourists looking to spend on luxury goods. There is also hope that a recent rise in residential rents could help home prices.

After an exodus of professionals and other residents in recent years, people have started to move to the city, including foreign students and those coming to Hong Kong through government talent schemes designed to reverse a brain drain. That is helping rents pick up after hitting a bottom in the first quarter, and could lead to more demand for properties as investments, said Cusson Leung, head of property research in Hong Kong at JPMorgan.


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Home prices declined at a faster pace in May in major cities, while other data show a mixed picture for the world’s second-largest economy

Tue, Jun 18, 2024 3 min

China’s broken housing market isn’t responding to some of the country’s boldest stimulus measures to date—at least not yet.

The Chinese government has been stepping up support for housing and other industries in recent months as it tries to revitalize an economy that has  continued to disappoint  since the early days of the pandemic.

But fresh data for May showed that businesses and consumers remain cautious. Home prices continue to fall at an accelerating rate, and fixed-asset investment and industrial production, while growing, lost some momentum.

“China’s May economic data suggest that policymakers have a lot to do to sustain the fragile recovery,” Yao Wei, chief China economist at Société Générale, wrote in a client note on Monday.

The worst pain is in the property sector, which has been struggling to deal with oversupply and weak buyer sentiment since 2021, when a multiyear  housing boom ended . The market still doesn’t appear to have found a floor, even after Beijing rolled out its most aggressive stimulus measures so far  in mid-May  in hopes of restoring confidence.

In major cities, new-home prices fell 4.3% in May compared with a year earlier, worse than a   3.5% decline in April, according to data released Monday by China’s National Bureau of Statistics. Prices in China’s secondhand home market tumbled 7.5%, compared with a 6.8% drop in April.

Home sales by value tumbled 30.5% in the first five months of this year compared with the same months last year.

“This data was certainly on the disappointing side and may ring some alarm bells, as May’s policy support package has not yet translated to a slower decline of housing prices, let alone a stabilisation,” said Lynn Song, chief China economist at ING.

Economists had also been hoping to see a wider recovery this month after Beijing started  rolling out  a planned issuance of 1 trillion yuan, the equivalent of $138 billion, in ultra-long sovereign bonds in May. The funds are designed to help pay for infrastructure and property projects backed by the authorities. Investors  gobbled up  the first batch of these bonds.

Monday’s bundle of economic data, however, underlined how the country still isn’t firing on all cylinders.

Retail sales, a key metric of consumer spending, rose 3.7% in May from a year earlier, compared with 2.3% in April, according to the National Bureau of Statistics. While the trend is heading in the right direction, it is still a relatively subdued level of growth, and below what most economists believe is needed to kick-start a major revival in consumer spending.

The expansion in industrial production—5.6% in May compared with a year earlier—was down from April’s 6.7% increase. Fixed-asset investment growth, of which 40% came from property and infrastructure sectors, also decelerated, to 3.5% year-over-year growth in May from 3.6% in April.

Key to the sluggish economic activity data in May—and China’s outlook going forward—is the crisis in the property market, which has proven hard for policymakers to address.

The property rescue package in May included letting local governments buy up unsold homes, removing minimum interest rates on mortgages, and reducing payments for potential home buyers. It also included as its centerpiece a $41 billion so-called re-lending program launched by the People’s Bank of China, which would provide funding to Chinese banks to support home purchases by state-owned firms.

The hope was that by stepping in as a buyer of last resort for millions of properties, the government would manage to mop up unsold housing inventory and persuade wary home buyers to re-enter the market. In turn, Chinese consumers, who have  most of their wealth  tied up in real estate, would feel more confident about spending again, thereby lifting the overall economy.

But the size of the re-lending program wasn’t big enough to convince home buyers, said Larry Hu , chief China economist at Macquarie Group. “Meanwhile, their income outlook also stays weak given the current economic condition,” he said.

For the property market to bottom out and reach a new equilibrium, mortgage rates, which stand at around 3-4% in China, need to be as low as rental yields, which are currently below 2% in major cities, said Zhaopeng Xing, a senior China strategist at ANZ. He said that a large mortgage rate cut will need to happen eventually.

The other key part of China’s push to revive growth revolves around the manufacturing sector, with leaders  funnelling more investment  into factories to boost output and reduce the country’s reliance on foreign suppliers of key technologies.

The result has been a surge in production. But with domestic consumption not strong enough to absorb all those goods, many factories have been forced to cut prices and seek out more overseas buyers.

Data released earlier this month showed that  Chinese exports rose  faster in May than the month before.

However, the export push is  butting into resistance  as governments around the world worry about the impact of cheap Chinese competition on domestic jobs and industries. The European Union last week said it would  impose new import tariffs  on Chinese electric vehicles, describing China’s auto industry as heavily subsidised by the government, to the point where other countries’ automakers can’t fairly compete.

The U.S.  has also hit  Chinese cars and some other products with hefty duties, while countries including Brazil, India and Turkey have opened antidumping investigations into Chinese steel, chemicals and other goods.

Beijing says such moves are protectionist and that its industries compete fairly with global rivals.