Bleak outlook for Hong Kong property

The prospects for Hong Kong's residential property market look bleak: investors are put off by the decrease in rents and homeowners have lost confidence due to rocketing levels of unemployment. Wednesday's budget might have provided a minor positive, but there is little chance of a rebound in the near term.

Key indicators, such as transaction levels and rent prices, are down. According to property agent Ricacorp, there were just 561 transactions in the 50 housing estates that it tracks in the first half of February, a reduction of 21.9% from the same period in January. A research note from Citi gives the example of monthly rents in a Kowloon East development falling as low as HK$9.9 per square foot, the lowest for the housing project since 2003.

Macroeconomic figures are partly to blame. Currently, 4.5% of the Hong Kong population is unemployed but this is expected to reach 6% by the summer. Job creation measures, announced in Wednesday's budget, could assuage some of the effects of unemployment, however.

The correlation between house prices and unemployment is stark. The last time Hong Kong's property market reached a bottom was in the summer of 2003, when the number of people out of work peaked at nearly 9% of the population.

And the strain on homeowners is already showing. By December, 10,949 mortgage holders, representing 2% of all residential mortgages, were in negative equity -- the highest level since December 2005.

The Hong Kong budget put forward HK$1.6 billion ($205 million) to create 62,000 new jobs over the next three years. The largest chunk goes to "Operation Building Bright" which will generate 10,000 jobs in repair and improvement over the next two years. The scheme will cost HK$700 million ($89 million). For new graduates, the government will be giving HK$140 million ($18 million) to employers in order to subsidise 4,000 internships. Other sectors to benefit from the employment initiatives are the construction industry, the IT industry, and engineering.

Even if the government is successful in creating these new jobs, the total number is relatively small when compared to the total job pool. And as Sherman Chan, an economist at Moody's, points out in a research note, the unemployment figures do not fully reflect the fact that households have less cash "as many workers have been given pay cuts or had their hours reduced". 

The outlook for Hong Kong's property market in 2009 remains pessimistic. A recent report by Colliers International holds that "market sentiment will remain depressed over the near to medium term. Although individual banks have turned more practical in offering mortgage loans to their customers in the fourth quarter 2008, a sustained recovery will not materialise until the full restoration of credit markets and global economic fundamentals".

And the attitude towards companies operating within the sector is therefore equally depressed. Fitch Ratings has a negative outlook on Hong Kong's residential property market and notes that all the major real estate companies are conglomerates with stable revenue coming from non-residential leasing in other industries, such as container terminals. But the report does single out Sun Hung Kai Properties, whose good brand name has helped it to sell units in previous downturns.