Hong Kong and Singapore home prices predicted to rise 5 per cent and 2-3 per cent, respectively, but with no imminent threat of asset bubble burst

2012-09-24

With the latest round of quantitative easing (QE3) announced by the Federal Reserve (FED) on September13, 2012, a flood of massive liquidity is predicted to flow into the global economy. While the U.S. and European markets struggle to achieve a distinct recovery, the move by the FED is likely to spur asset price inflation in Asia.
 
At the first and second round of QE, both Hong Kong and Singapore have experienced a different degree of upturn in their residential property prices. Similarly, home prices in both markets are anticipated to increase due to the QE3.
 
However, given the tighter local banking policies and government measures and supply, an asset bubble burst is unlikely in these two markets in the short term. Over the next 12 months, Colliers International predicts a mild increase of 5 per cent and 2-3 per cent for residential prices in Hong Kong and Singapore, respectively.
 
Hong Kong
During QE1 (from December 2008 to March 2010) and QE2 (from November 2010 to June 2011), Hong Kong’s residential prices registered substantial increase of 37 per cent and 15 per cent, respectively.
 
Analysing the impact of U.S. bond yields and Hong Kong’s residential property prices, Mr Simon Lo (盧永輝), Executive Director of Research & Advisory, Asia, says that the introduction of QEs has actually compressed bond yields in the U.S. By virtue of correlation between U.S. bond yields and Hong Kong’s residential property prices, a 2 per cent rise in Hong Kong’s residential prices are anticipated for every 10 basis point reduction of U.S. bond yields.
 
“As inflationary pressure on real estate prices grows amid QE3, the risk of an asset bubble is building up. However, there is no imminent threat of an asset bubble burst in Hong Kong, which currently sees solid economic fundamentals with low unemployment rate,” explains  Mr Lo.

Cautious lending attitude by local banks has built up firewalls to weather any unpredictable decline of property prices such as stringent stress tests to assess potential homebuyers’ repayment ability. Since the beginning of 2010, the average LTV ratio has kept below its long-term average of 62 per cent, representing sound status of the local banking sector.
 
Mr Lo believes that the Hong Kong Monetary Authority’s lowering of loan-to-value ratios (LTVs) from 50 per cent to 40 per cent on the second residential property will cool down market sentiment, although it causes little impact on corporate investors with strong balance sheets or cash buyers.
 
According to Colliers International’s base-case scenario, overall residential price in Hong Kong is predicted to edge up by 5 per cent in the next twelve months.
 
Singapore
Singapore’s residential prices see relatively less correlation with compression of U.S. bond yields and are not historically vulnerable to QE announcements, as compared to Hong Kong.
 
During QE1 and QE2, Singapore’s residential prices edged up 7.5 per cent and 4.2 per cent, respectively, which were relatively milder than the home price inflation experienced in Hong Kong during the same period.
 
“Short term boost in buyer sentiment is expected with the QE3, but we think that the effects will be limited in Singapore and will likely peter out before the end of 2012,” says Ms Chia Siew Chuin (谢岫君), Director of Research & Advisory, Singapore.
 
Ms Chia adds, “Singapore’s housing market is not directly susceptible to foreign capital flows as approximately 80 per cent of the population resides in public housing apartments. This represents a sizeable housing stock under the government’s control.
 
In addition, the government has introduced five rounds of cooling measures to curb the overheated housing market since 2009, including the most recent one targeting foreigners and non-individuals (corporate entities) with an additional buyer’s stamp duty of 10 per cent . This has lowered the participation of foreigners in Singapore’s private housing market, where a mere six per cent of all purchases from January to August 2012 were made by foreign buyers.” 

With foreign buyers deterred by the government’s cooling measures and the majority of demand coming from local purchasers, any significant increase in home prices over the short term is likely to cause buyer resistance, which local developers in Singapore are also cautiously sensitive to.
 
Furthermore, the government has been releasing ample amount of residential development land to sustain stable supply in the market. Over the next three years from 2013 to 2015, an estimated total of over 50,000 housing units are expected to be completed, representing an increase of 18.5 per cent  from the housing stock of 273,050 units as of 2Q 2012.
 
Coupled with sizeable residential new supply in the coming few years and the existing buyer resistance to home prices that are already at record levels, Singapore’s housing market is also taken care by the government who may implement more measures to curb any artificial froth built up by QE3. With limited impact on Singapore’s housing market from QE3 expected, prices are predicted to edge up slightly by at most 2 per cent -3 per cent in the next twelve months.