FOCUS: Hong Kong property market can gain little from rate cut in mid-term

HONG KONG (AFX-ASIA) - The residential property market is unlikely to benefit much from the series of interest rate cuts effected so far this year because of a persistent over-supply problem in the sector, analysts said.

          At the same time, consumer confidence remains fragile given concerns over job security and there may be be little prospect of any return to the sharp increases in prices seen in the past, they said.

          So far, Hong Kong has cut interest rates four times this year, following the FOMC, to leave the local prime rate at 7.50 pct, the lowest level for the past decade.

          While each cut has been welcomed as a boost for the residential property market, initial euphoria has quickly faded in the face of concern about over-supply, with property prices up less than 5.0 pct for the first four months of the year.

          Alex Tang, president of the Society of Real Estate Agents, said he would not interpret the recent more positive tone as a recovery in the property market.

          "The market for second-hand residential property, especially in the northern part of Hong Kong, remains quite weak ... In Tuen Mun, for instance, a lot of residential flats are selling at a price of just slightly above 2,000 hkd per square foot," Tang said.

          Generally, there is excess supply of medium-sized residential flats in Hong Kong and this will remain serious in the next few years, he said, noting also that the government's stated aim of 70 pct home ownership may act to dampen the market.

          "In the long term, the government hopes that over 70 pct of local households will have a flat of their own," he said.

          "It is true that the supply of residential flats may fall in the longer-term as the government has cut land sales for the past few years, but with its underlying housing policy, the government may increase the sales later and the supply of flats will become excessive again," he said.

          Tang said the local property market may recover in 2-3 years if the economy continues to improve and the government does not change its housing policy drastically.

          In terms of area, property prices on Hong Kong Island have a stronger growth potential because of land supply shortage for new residential development, he said.

          "On Hong Kong Island, there has always been a limited supply of land ... there is no way the government can increase the land supply unless it demolishes old buildings," he said.

          Albert Lam, an analyst with Vigers Property Agency, agreed that limited land supply will support property prices on Hong Kong Island but he is skeptical about a recovery in the property market overall.

          He said homebuyers have become reluctant to take on a mortgage given concerns about job security.

          "Most people feel insecure about their job. They will not be reckless in buying a flat because of low job security," he said.

         The local job market is much weaker than in 1997, when the unemployment rate was 2.0-3.0 pct, he said, adding that homebuyers remain pessimistic about their employment prospects.

          For the three months to March, the unemployment rate was 4.60 pct, compared with 4.50 pct for the 3-month period to February.

         "It is a considerable burden if you have a mortgage. For instance, given a flat worth 4.0 mln hkd, you will need to pay 26,000 hkd per month if you obtain a mortgage of up to 70 pct of the flat's value," he said.

          Lam said market sentiment turned more positive in March, after the government relaxed anti-speculation measures on the sale of housing units in mid-February.

          "However, the improved sentiment was temporary, as evidenced by the falls in the number of transactions in the property market subsequently," he said.

          The Land Registry recorded 7,853 sale and purchase agreements on residential and non-residential building units in April, down from 11,412 in March. Usually, about 80 pct of such transactions are in the residential category.

          Going forward, property prices will grow at only a steady pace and residential property will no longer be a high-return investment instrument, Lam said.

          Against the generally negative view on the property market, Midland Realty director Victor Cheung said he believes that interest rate cuts will eventually push up property prices.

          "The property sector has had a difficult time for the past three years and it is on track for recovery, although property prices may not rise massively in the short- to medium term," he said.

          He said medium-sized residential flats have become more affordable, with prices now half of the peak levels in 1997.

          In addition, Cheung said the government's plan to reduce the supply of housing units under the Home Ownership Scheme will support the property market.

          The government has said it will offer less than 20,000 flats under the Home Ownership Scheme for year to March 2002, against the previous plan to supply 27,000 units.

          "It takes time for the public to rebuild their confidence ... in the medium -term, property prices can record moderate stable growth," Cheung said, estimating the upturn for this year at 10 pct.

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