Turning Point

August 15, 2006

After 17 successive interest rate increases, the United States Federal Reserve has finally halted the rate hike last week, signaling the possible advent of a period of stabilization. The local property market hailed such a move and property stocks firmed up immediately.

The current rate hike started in June 2004, when the property market was up-climbing. The accumulated magnitude of rate increase finally took its toll and property market softened from second quarter of 2005, bringing price down. Despite the growing momentum of local economy, property market has not to-date enjoyed the same prosperity as other sectors in the last 12 months. Strong rental market failed to stimulate the sales market. and yield on property investment edged up as a result but is still below cost of fund. This explains why investors are shunning property investment. leaving only end users in the buying market.

On the sales front, both primary and secondary markets were disappointing. Developers' creative marketing campaigns failed to revive the lackluster sales market. The only "trick" that worked is a straight-forward price cut, as seen in the swift sale of the remaining units at Tower 15, Hong Kong Parkview in June. However, not all sellers were down to earth, as some of them held on to above-market prices, oblivious to market reality. This coupled with the quiet season of summer holiday has led to a dwindled transaction volume.

The leasing market however enjoyed a robust growth, probably the strongest in recent years. Expansions of multinationals and local companies on the back of speeding economy had fuelled the demand for luxury housing. High quality stock quickly dried up, especially in Midlevels Central and the Peak. A sudden imbalance of supply and demand pushed up rental level in these areas.

The full impact of interest rate stabilization is yet to surface. There is still no consensus on the direction of the rate in the near future and property investors have so far reacted cautiously. Local banks nevertheless are quick to seize this opportunity to increase their presence in the mortgage market. Bank of China (Hong Kong) has just announced that its prime rate will be lowered to 8% p.a., in line with HSBC group, which is a major mortgage provider. Some banks have offered new mortgage rate as low as prime-3%. With the first half of 2006 passed without much progress in mortgage business, banks are set to engage in mortgage war again for the remainder of the year. This will be warmly welcomed by the market in general and will become a new impetus in the growth of sales transactions.

By Karen Xu