If property bubble bursts, market will suffer adverse feedback loop

Hong Kong faces a higher risk of an abrupt fall in home prices after they recorded a sharp run-up over the past few years, the International Monetary Fund warned on Wednesday, while cutting its 2012 growth forecast for the Hong Kong economy to 1.25 percent from 1.8 percent.

After a short respite late last year, the surge in property prices has resumed, defying the general slowdown in economic activity. Housing prices have increased by 20 percent so far this year and are now double the trough of 2008, IMF said in a statement.

The mass property market's price increase has been particularly pronounced of late, which is exacerbating affordability concerns. A combination of limited supply of new housing, strong demand from local and non-local purchasers, and low interest rates imported from the United States has been driving up the housing prices.

The city's rising home prices have reached a prohibitive level straining average buyers' affordability, with residents' confidence in their ability to purchase a flat falling to its lowest level in at least over four years, according to a survey released by City University in October.

Hong Kong people are suffering from the sky-high home prices that they are unable to afford, and the high prices situation is unlikely to reverse in the near future, the survey shows.

IMF warns that "the sharp run-up in house price raises the risk of an abrupt correction."

Although in the past, the banking system has proven resilient to substantial downswing in real-estate prices, the property sector represents half of outstanding loans for use in Hong Kong, with additional risks coming from the use of real-estate as collateral, IMF said.

A sharp price correction would lead to falling collateral values and negative wealth effects; it will have impact on households, on banks and on the quality of corporate assets, which could trigger an adverse feedback loop between economic activity, bank lending, and the property market, Steven Barnett, mission chief for the Hong Kong SAR at IMF, told a press conference in Hong Kong on Wednesday.

"The property sector is the main source of domestic economic risk," said Barnett.

Barnett adds that as the Hong Kong government has implemented a series of policies to prevent the risks from materializing, the probability of a sharp correction in real-estate sector is fairly low in the near term.

The recently adopted Buyer's Stamp Duty (BSD) and extension of the Special Stamp Duty (SSD) should help dampen housing demand, and it has clearly has had an impact on the transactions (in the property market), said Barnett.

He stressed that in the longer term, the key measure to address the housing market is to increase the land supply, which is also what the authorities in Hong Kong intend to do.

The Hong Kong government has also taken other appropriate macro-prudential measures to help safeguard the banking system, such as progressively tightening loan-to-value and debt service ratios. These measures should continue to be fine-tuned in line with evolving risks, IMF suggests.

IMF also revised downwards its projection for Hong Kong's GDP growth in 2012 to 1.25 percent from 1.8 percent. The slowdown is being driven by trade developments, with net exports expected to subtract 1.75 percentage points from growth. The city's GDP growth in 2013 is expected to recover to around 3 percent, the forecast is also revised downwards from the 3.5 percent it released in October.

Financial Secretary John Tsang said later on Wednesday that he is glad that the delegation of IMF supports Hong Kong government's policies in response to global risks and uncertainties of the external environment.

The Hong Kong government will continue to take positive and appropriate measures, including taking countercyclical fiscal measures, if necessary, to support the economy, said Tsang.

sophiehe@chinadailyhk.com

(HK Edition 12/13/2012 page2)