Hong Kong Property Sector - Higher Hopes, Larger Disappointments

Valuations looking stretched — We believe that the recent rebound in share prices presents enhanced opportunities to sell selected property stocks like SHKP and Sino Land, whose NAV discounts have narrowed remarkably already.

Jan likely to be the "hope season" — January could be a honeymoon period for investors on HK property, who buy equities in the hope that stimulus policies worldwide gain traction and HK mortgage interest rates come down. However, if the unemployment situation in HK deteriorates and deflation emerges as a serious threat in China, the market could roll over again after Chinese New Year.

Significant mortgage interest rate cuts unlikely — The recent falls in the 3-month HIBOR (to 0.85% on Jan 8) have led to hopes on mortgage interest rate cuts in HK, and share price rallies for the Hong Kong property stocks. In our view, the latest falls in HIBOR represented a normalization of the mortgage rate-HIBOR spread, rather than a call for a sharp decrease in mortgage interest rates. On our analysis, the spread between mortgage interest rate and 3-month HIBOR is now 2.55%, which is only slightly higher than the historical average spread of 2.15%.

Affordability not as strong — On our calculation, the monthly mortgage payment for a 591sf apartment would now make up about 59% of the median household income. While this is slightly below the historical average of 64%, this is higher than the banks’ normal threshold of 50% for granting a mortgage. With banks still pretty stringent on the evaluation and approval process for granting mortgages, a payment-income ratio of 59% does not look encouraging at all.

Diminishing impact of lower rates on affordability — And given the already low mortgage rates now, the marginal boost of further rate cuts to affordability appears far from significant. For example, for a 25bps cut in mortgage rate, the monthly mortgage payment would only decrease by 2%, and the affordability ratio would only fall by 1%. Even if the mortgage rate drops 125bps, back to the historical low of around 2.25%, the affordability ratio would be 53% – still higher than the 50% banks’ threshold and much higher than the trough of 32% during 2003.

Income and employment more important than interest — On our analysis, just a 10% decline in household income would be enough to erase the improvement in affordability brought about by a 125bps cut in mortgage interest rates (i.e., mortgage rates back to about historical low). Until we see better visibility on the job market, we expect to see further downside in property prices.

Sponsored Links