14 January 2015
There was no surprise in this year’s policy address, as the Chief Executive C Y Leung continues to focus on housing, economic development and competiveness in his third policy address given today. In terms of real estate, with an intention to ease housing shortage, he has raised the short-term supply target of private residential units over the next three to four years to 74,000 flats (i.e. 18,500 units per annum), up from “68,000 units over the next five years” mentioned in last’s year’s policy address. The government has addressed a target of 480,000 public and private flats over the next decade with private housing accounting for 40% (i.e.19,200 units per annum).
He also identified the availability of land in the longer term. Meanwhile, there was no indication in the Policy Address as to when the existing cooling measures will be withdrawn or eased. It is our view that the government should not introduce more real estate market curbs. The following summarises our views on the key real estate related initiatives in the Policy Address.
1. Leung has set out a new home target of 480,000 public and private units by 2025, up by 10,000 units from his Policy Address in 2014. With 40% of those being private homes, this gives an estimate of 19,200 new flats per annum. Leung also addressed the need to ensure the provision of land supply for housing developments.
New supply in the private housing market is expected to average at 19,200 units per year over the next decade. Although all these figures show an improvement on the annual supply of about 11,500 units over the past ten years (2005-2014), it is still much lower than the long term average of about 28,000 units per year between 1980 and 2004.
We understand the government finds it hard to secure enough land for residential developments to meet the supply goal. In reality, the government has not been able to add any large scale sites to its land reserve. Although, some of the 150 sites zoned for government, institutions or community purposes or for green belts, as well as farmland, may be converted into residential use, only 45 housing sites have been given planning permissions. The market has no idea on the number of units generating from the 150 sites.
2. In the short-to-medium term, the government has raised a completion target of 18,500 private flats per year over the next three to four years, up from last year’s target of 13,600 units.
The government has lifted its completion target 36%. However, the government does not have total control over the supply situation, as the effective supply at the end of the day – the launch date, is very much dependent on developer’s timelines. The market is skeptical as to whether the target can be met over the next few years and do not expect any drastic increase of new housing supply over the short term. A total of 12,293 new private residential units were completed over the first ten months of 2014, according to Buildings Department, which is below the primary sales absorption rate of 14,000 units in 2014. There is no immediate solution to the current tight supply situation and demand will continue to build up in the market before ample supply becomes available. One way to significantly boost new supply is via the development of more new towns and residential developments above railway projects.
To make concrete efforts on the housing front, the market is hoping that the government will update the progress of future housing supply in a timely manner so as to increase visibility of the pipeline, as well as be able to add large scale sites to its land bank. This will help reduce rush purchases, as prospective buyers believe the supply target cannot be met and as a result, decide to buy a home now, which then pushes residential prices to a record level.
3. Leung has suggested selling subsidised flats and public rental housing flats to eligible applicants. In addition, there was no indication in the Policy Address as to when the existing cooling measures will be withdrawn or lifted.
Hong Kong residential prices continued to climb in 2014 despite various curbs imposed. Affordability of housing has become a growing issue. The selling of subsidised flats will help public housing tenants to buy their own homes.
Deteriorating affordability means homebuyers will have to compromise with smaller flats. We expect demand for primary units, especially those small-to-medium sized units, will remain strong in 2015. Private residential prices will continue to rise this year but at a slower pace, a 3-5% growth, considering much of the end-user demand was absorbed in 2014. Demand curbs brought in to suppress demand have had little impact on prices. As such, the existing cooling measures will remain in force despite rising supply because it is still not sufficient to meet demand.