Everything suddenly goes the wrong way.
As in so many housing bubbles, soaring apartment prices feed epic high-rise construction booms with the promise of big profits backed by easy money. Years can pass between initial plan and completion, and now the fruits of Hong Kong’s epic construction boom are hitting the market just when prices are crashing and sales collapsing.
In the first quarter, the number of housing units under construction set a new frenetic record: 13,300, the South China Morning Post reported, citing the Transport and Housing Bureau. By comparison, in all of last year, 14,200 homes were under construction. In 2015, 11,300 new homes were completed. This year, the number will jump 61% to 18,200! Over the next three to four years, 92,000 new homes will hit the market.
And this is happening just as home sales are plunging. According to the Rating and Valuation Department’s April Property Review, sales for January and February – the most recent months included – plunged 69% from a year ago to 3,852 homes. February’s 1,807 home sales was a 25-year low.
Prices have already taken a hit. After peaking in September last year, they’ve fallen every month since, including in March, when they fell 1.3% from February, according to the Rating and Valuation Department. Over those six months, home prices have plunged 11.7%.
And there’s more gloom on the way. The SCMP: “An increasing number of property analysts expect home prices to fall in the next two years, with Nomura predicting they will fall by a further 19% by the second quarter of next year.”
With prices careening lower, the number of mortgages with negative equity — when the outstanding amount exceeds the value of the home — is suddenly jumping. And that’s the bane of any housing market. When it takes on large proportions after hefty price declines, that’s when homeowners abandon efforts to even make mortgage payments, and when lenders are starting to be at risk.
Last December, three months into the Hong Kong housing bust, there were still only 95 cases of negative equity. But by the end of March, their number had exploded by a factor of 15 to 1,432 cases, the highest since 2011, the Hong Kong Monetary Authority, the city’s central bank, reported today. The aggregate value of mortgages with negative equity soared by a factor of 12 to HK$4.92 billion (US$634 million).
But it’s just the beginning after a few months of price declines. “Hong Kong’s record in negative equity cases stands at 105,697, set at the height of the Severe Acute Respiratory Syndrome (Sars) epidemic in 2003,” the SCMP explained. But this time, there’s no Sars epidemic to blame.
Credit problems are already appearing: The number of foreclosed homes has doubled from a year ago to about 130. And this too is just the first feeble beginning. These things take time to build up and play out.
Yet prices are still 58% higher than at the prior crazy bubble peak in 1997, and pandemic affordability is a huge problem as middle-class families have trouble buying even a tiny apartment. So the government has decided to tackle the problem and allow, or even encourage, the construction boom to put excess supply on the market and bring down the housing mania. It appears to be working.
The SCMP cited Financial Secretary John Tsang Chun-wah as saying that “property prices are still out of tune with the overall economic situation and general affordability.”
And so prices would have to drop a lot more. The overall economic uncertainty doesn’t help. Mainland Chinese investors – now tangled up in their own market turmoil and collapsing wealth management schemes – had piled into Hong Kong real estate even more so than they’ve piled into Vancouver and other cities around the world apparently. And now they’re getting second thoughts as prices are heading south, liquidity is drying up, and another portion of their wealth is evaporating.
Last year, $674 billion fled China. The Institute of International Finance estimated that $538 billion would flee China this year. Reserves have plunged 20% to $3.2 trillion. Much of it is illiquid and cannot be used to stabilize the currency. If the Chinese fret that the yuan could fall in a “disorderly” manner, capital flight could accelerate. And this would have broader ramifications. Read… China’s “Lehman Moment” or Decades of Japan-Style Stagnation?