R1 SCMP Real Estate Cycle Nearing Peak Dec 1 2005

R1 SCMP Real Estate Cycle Nearing Peak Dec 1 2005 -...

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Unformatted text preview: Wednesday, November 30, 2005 South China Morning Post CONCRETE ANALYSIS Real estate cycle may be nearing peak Historic pattern suggests approaching maturity, but economic patterns have changed since the 1997 economic crisis CHI LO Cyclical experience suggests that the property cycle is peaking out. The average duration for the office market cycle was 20.5 quarters in past cycles, while that for the residential market was 21.3 quarters. The present cycle is already 10 quarters old for both the office and residential sectors. If history is any guide, the up-cycle is approaching maturity. The behaviour of the grade-A office and luxury residential markets is similar to that of the overall market. However, past cyclical behaviour may not be indicative of the future because the cycle dynamics have undergone a structural shift, due to a change in the underlying economic pattern following the Asian economic crisis. In the 1980s and '90s, Hong Kong had a high-inflation economy with robust growth. Low and negative real interest rates boosted GDP growth which, in turn, boosted property prices and created an asset bubble. Asia, including Hong Kong, has entered a post-bubble economic transformation since the financial crisis. The new economic environment is dominated by disinflation, cutthroat competition, constrained demand growth and a profit squeeze - all of caused by the unleashing of excess capacity from Asia after the 1997-98 regional debacle and aggravated by continued globalisation. In future, Hong Kong's property cycles could resemble the subdued cycle of 1998 -2003, when capital values fluctuated in a smaller range relative to the previous cycles. Property fundamentals remain benign at present. Office demand is underpinned by an improved business environment, capital inflows and arrivals of multinational companies. Presuming this economic cycle still has room to run, the wealth effect for property owners and the improved job market will underpin healthy housing demand. Also, housing affordability is still 60 per cent below the 1997 peak. However, affordability may not necessarily drive the market. Further, the growth in the number of households that represent starter and trade-up demand is turning positive after years of decline. Official data shows that the number of households in the income range of between $20,000 and $30,000 a month, the starter level for a private home, grew the fastest last year among the various income groups. The return to growth of the group earning more than $30,000 is also supportive of trade-up demand. Against this demand backdrop is shortage of supply in the next few years. Office supply is especially limited in Central, where there is little coming to the market until 2009. For residential properties, average completion between 1995 and 1998 was 20,700 units, but the average for 2005-2008 is expected to be 18,700 units. The wild card lies in the two railway firms, which have the capacity to raise supply by almost 20,000 units in 2008-09. On the risk side, the market is facing increasing foreign trade risk, rising interest rates, high and rising oil prices and a potential US economic shock. Hong Kong's interest rate rises reflect both the currency peg with the US dollar and strong local growth. The return of inflation, albeit mild, will lessen the market impact of the nominal rate rises, but if rates rise faster and are aggravated by a liquidity drain, the negative impact could be quite sharp. If there are no new stimuli, the benign market conditions may last for another year, or two at most. A preferable trading strategy, with a one to two- year time span, is to buy and hold under these circumstances. Chi Lo is head of Asia Research at Grosvenor. ...
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This note was uploaded on 09/06/2010 for the course FINA FINA0805 taught by Professor Tse during the Spring '09 term at HKU.

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