Hong Kong Home Prices to Drop 30% as Barclays Joins UBS, Merrill

Hong Kong Home Prices to Drop 30% as Barclays Joins UBS, Merrill

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 percent 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 today. They assigned a “negative” rating to the Hong Kong property sector and said office prices will drop 20 percent.Barclays’ 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 it covers, 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 percent of its revenue outside Hong Kong in the first half, are the only two property stocks Barclays recommends investors to buy.

Slowing Sales

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 percent since peaking in January. It rose 0.3 percent as of 11:27 a.m. local time.

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 ($258,000).

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

Chief ExecutiveLeung Chun-ying, who has pledged to increase land supply since coming to office in July 2012, said in January the private sector may sell 67,000 homes in the next three to four years. Hong Kong developers completed 48,936 homes from 2008 to 2013, the lowest in any five-year period since data became available in 1985.

Previous Peak

Hong Kong home prices last year surpassed a previous peak in 1997 and are now the world’s highest, according to realtor Savills Plc, after having more than doubled since 2009. They have fallen about 2.7 percent since rising to a record in March, according to an index compiled by Centaline Property Agency Ltd.

Raymond Ngai of Bank of America’s Merrill Lynch unit and UBS’ Eva Lee are among analysts who over the past month have forecast home prices in the city will drop as much as 25 percent as demand wanes because of government curbs and the expectation of rising interest rates.

Since 2010, Hong Kong has introduced a raft of measures, including extra property transaction taxes and tighter mortgage-lending requirements, to damp prices and avert a housing bubble. Total residential transactions in the first half fell to the lowest since 1996, according to data available on the Land Registry’s website.

Hong Kong’s real estate market may also face pressure as the U.S. Federal Reserve prepares to trim stimulus, according to the Merrill Lynch and UBS analysts. Mortgage costs in the city tend to track interest rates in the U.S. because the Hong Kong dollar is pegged to the U.S. currency.

To contact the reporter on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net