Is bear market confirmed for HK? 20221031

The observation that HK housing is in a downcycle has become consensus of late, after the CCL reaches a new low last week from the triple top dating as far back as 2019 (see green line in Chart 1). Cumulatively the index is now down 12% from the Aug 2021 high:

Chart 1: Home prices denominated in various currencies

But across the world, investors will always think about returns in their own currencies, and therefore, an 'objective consensus' of a true bear market in any asset price is only formed when the bulk of observers around the world see the same down trend that the base currency investors also sees.

So in order to find out whether the HK home prices are truly in a bear market by consensus (Chart 1 does not seem to suggest that is the case), let's take a look at the index as denominated in a few main jurisdictions:

a) the collective non-USD community (as proxied by DXY);

b) the EU community (as proxied by Euro);

c) the Brits (as proxied by GBP); and

d) gold bugs (as proxied by the price of gold).

HK still in bull market to world at large

From the point of view of the developed world population (as the USD index is represented by six liquid currencies, see Chart 3), however, the drop in HKD (blue line in Chart 2) terms is not corroborated by the price as measured by DXY the USD index:

Chart 2: Home price in non-USD terms still trending up

In fact, the non-USD price index is still very much heading up, from the longer term view (green dotted lines) to medium term view (red dotted lines), to even the shorter term time horizon (blue dotted lines)! What this suggests is that for the average OECD investor, HK property is still a rising asset.

Chart 3: make up of the DXY - 6 currencies

Home prices even more bullish for Europeans

For the average person based in Euro, the upward momentum seems even stronger compared to DXY, and HK prices, thanks to the collapse in Euros in the last few months, seem to be accelerating upwards within the red channel:

Chart 4: Euro investors may see HK prices accelerating upwards

Brits also feel the upturn?

Similarly, with the recent precipitous drop in the value of the Pound, the HK home price index will appear to the average Blighty investor to be positively surging even, after HK first started pulling away from a very correlated pairing between the HKD and GBP denominated indices which pretty much shadowed each other since our data started in 1981:

Chart 5: HK prices look strong to the British Pound investor

The much weaker pound post Boris's premiership (botched Brexit plus zealous lockdowns?) ensures that the weak pound has provided a strong platform for HK assets to appear to go from strength to strength.

Gold the only currency beating HK property?

For those who believe in gold, there is good news - In Gold terms, the 1997 peak remains the unsurprised top for HK home prices, meaning that we may still be in a bear market when measured from the perspective of the precious metal:

Chart 6: Gold strong vs HK, but mini breakout underway?

Even though the price index has broken above a near term trading channel, as indicated by the red arrow in Chart 6, if war does flare up more next year, we think gold might reassert its dominance and the break up could reverse. Time will tell.

Strong currency imports deflation, which is not a bad thing now!

In normal disinflationary times such as most of the past 40+ years, being pegged to the USD is good for HK assets during times of weak USD, as Chart 7 illustrates - weakening or weak USD is generally accompanied by bouts of strong home price increases, and the reverse held true (mostly in the mid/late 90s):

Chart 7: weak USD good for home prices, and vice versa - will it be different this time?

However, could we be in a period similar to the early 70s or early 80s, when strong USD will suck liquidity away from HK and produce deflation? How does this contrast the current super high inflationary environment? Is the strong USD a blessing as it reduces the 'cost of living' crisis that would otherwise hit these shores?

A very interesting dynamic, not seen before in our brief monetary history for sure... The above study shows that, whilst we remain somewhat bearish on the outlook of the HK market, more needs to happen in the global currency markets before it is a true foregone conclusion...

The author would like to thank Lee Man Hin Carson from The University of Hong Kong majoring in Accounting and Finance for assisting in data collection, analysis, and drafting of this article.

2022 HK policy address speech - Pro property and pro industrial 20221019

Key points of the policy speech are as follows:

a) all out attracting talent to HK - a must do given the loss of 140k population in the past 2-3 years, this is contained in divider a) below;

b) more drive for family office hub as well as other small measures of business support see divider b);

c) housing bad policy continues - i) plundering private market share with every rising PRH/HOS supply, resulting in every higher private home prices and ever more public housing slaves - what a missed opportunity! ii) displacing brownfields into new built industrial - likely insufficient vs demand; iii) private supply low, but development process shortening. see divider c);

d) major speeding up of infrastructure build out - mostly roads and rails, very positive and lots of opportunities opening up for the smart property investor see divider d).

In summary - talent will not come unless we lift the lockdowns, but otherwise by and large a pro property speech with lots of bright spots, but sadly will not help affordability of housing, which is unsurprising given how entrenched the public-housing vested interest groups is!

below are extracts of the speech, emphasis are mine, with odd comments thrown in:

-----------------------------------------------------a) Talent------------------------------------------------------------

Attract Enterprises, Investment and Talents to Enhance Competitiveness

26. …new institutional setups and implement an array of new initiatives targeted at attracting enterprises, investment and talents:

establish the Office for Attracting Strategic Enterprises (OASES), led by the Financial Secretary, for attracting strategic enterprises …offering them special facilitation measures and one-stop services;

establish the Talents Service Unit, led by the Chief Secretary…formulating strategies to recruit talents;

set up Dedicated Teams for Attracting Businesses and Talents …reach out to target enterprises and talents and persuade them to pursue development in Hong Kong;

set aside $30 billion from the Future Fund to establish the Co-Investment Fund for attracting enterprises to set up operations in Hong Kong and investing in their business;

launch the Top Talent Pass Scheme;

enhance existing talent admission schemes; and

upon becoming permanent residents, apply for a refund of the extra stamp duty paid for purchasing residential property in Hong Kong.

27. The OASES will:

1. draw up a list of target enterprises …to reach out to and carry out negotiations with the enterprises;

2. measures covering aspects such as land, tax and financing that are applicable exclusively to target enterprises, and …tailor-made plans to facilitate the setting up in Hong Kong; and

3. provide the employees …one-stop facilitation services in areas such as visa application and education arrangement for their children.

Trawl for Talents

29. Over the past two years, the local workforce shrank by about 140 000. … We will:

1. launch the Top Talent Pass Scheme for a period of two years. Eligible talents will include individuals whose annual salary reached HK$2.5 million or above in the past year, and individuals graduated from the world's top 100 universities with at least three years of work experience over the past five years. …two-year pass …not subject to any quota. Individuals who graduated from the world's top 100 universities in the past five years and have yet to fulfil the work experience requirement will also be eligible, subject to an annual quota of 10 000;

2. streamline the General Employment Policy (GEP) and the Admission Scheme for Mainland Talents and Professionals (ASMTP), vacancies under the 13 professions in the Talent List with annual salary of HK$2 million or above, employers are not required to provide proof to substantiate their difficulties in local recruitment;

3. suspend the annual quota under the Quality Migrant Admission Scheme (QMAS) for a period of two years;

4. relax the Immigration Arrangements for Non-local Graduates (IANG) by extending the limit of stay from one year to two years …expand to cover the GBA campus of a Hong Kong university on a pilot basis for a period of two years.

5. enhance the Technology Talent Admission Scheme (TechTAS) by lifting the requirement for technology firms to employ additional local employees;

6. extend the limit of stay of employment visas … will be valid for a maximum period of three years; and

7. refund the extra stamp duty …become a permanent resident …can apply for a refund of the Buyer's Stamp Duty and the New Residential Stamp Duty paid for the first residential property purchased which they still own, while the Ad Valorem Stamp Duty at Scale 2 rates is still payable such that the overall stamp duty charged will be on par with that charged on first-time home buyers who are ordinary permanent residents.

30. waive the requirement of applying for an employment visa for more visitors participating in short-term activities in Hong Kong. …will expanding to more categories.

---------------------------------------------------b) Business Freebies--------------------------------------------

International Financial Centre

37. …strengthen asset and risk management – …to offer tax concession for eligible family offices. The target is attracting no less than 200 family offices to establish or expand their operations in Hong Kong by end-2025.

45. support the convention and exhibition (C&E) industry …new $1.4 billion scheme …to subsidise more than 200 exhibitions to be staged in Hong Kong over three years.

46. To provide further support for SMEs, we will:

extend concessions of government fees and charges –reduce 75% of water and sewage charges for non-domestic accounts for eight months from 1 December 2022 to 31 July 2023, subject to a monthly ceiling of $20,000 and $12,500 respectively per household. …provide 75% rental or fee concessions …tenants of government premises and eligible short-term tenancies and waivers under the Lands Department for six months from 1 January 2023 to 30 June 2023.

----------------------------------------c) Housing Madness Continues-----------------------------------------

63. The Steering Committee on Land and Housing Supply and the Task Force on Public Housing Projects …submitted …reports. set the following key strategies and targets:

1. introduce the new Light Public Housing (LPH), with about 30 000 units to be built in the coming five years; [ed: only bureaucrats know how to create more complex structures over already bewildering complicated infrastructure]

2. increase public housing production by about 50% in the coming five years (from 2023-24 to 2027-28);

3. cap the waiting time for PRH immediately. …6 years and shorten it to about 4.5 years in four years' time (i.e. in 2026-27);

4. saleable area of all subsidised sale flats completed from 2026-27 onward will be no less than 26 square metres [ed: public housing becoming ever more luxurious and ever larger – no longer a safety net];

Private Housing Supply

66. …the demand for private housing in the next 10 years will be 129 000 units. …providing no less than 72 000 residential units in the next five years. [ed: private ownership is now an after thought in the bureaucratic housing steam roller]

69. …plan to make available land in Yuen Long and Hung Shui Kiu for development of multi-storey industrial buildings from next year, with lease conditions requiring a certain portion of floor area to be set aside for leasing to the affected brownfield operators below market rent.[ed: supply will be much less than displaced brown field site GFA by far, good for industrial property]

70. Tseung Kwan O (TKO) Area …provide 50 000 residential units with the first population intake in 2030 at the earliest. [ed: not a pleasant district – ultra high density dormitory town]

71. To substantially compress the time required for land production, we will:

1. streamline statutory procedures – …bill to amend the Town Planning Ordinance, the Land Resumption Ordinance, the Foreshore and Sea-bed (Reclamations) Ordinance, the Roads (Works, Use and Compensation) Ordinance and the Railways Ordinance, as well as amendment to the Schedules to the EIA Ordinance …the time required …reduced from at least 6 years to 4 years, …large-scale projects from 13 years to 7 years, of which the time for the EIA process will be compressed to within 18 to 24 months;

2. …charging land premium at standard rates for redevelopment of industrial buildings. …extend this approach, [from] only industrial buildings and in-situ land exchange applications in NDAs, to cover agricultural land in the New Territories located outside NDAs to compress relevant workflow; [ed: will speed up industrial revitalisation speed]

3. …lowering the compulsory sale application thresholds for private buildings aged 50 or above but below 70 from 80% to 70% of ownership, and further to 60% for those aged 70 or above. For industrial buildings in non-industrial zoning, the threshold will be lowered to 70% of ownership for those aged 30 years or above; [ed: great for industrial, bad for minority private ownership rights]

----------------------------------------------------d) Infra Galore-----------------------------------------------------

Drive Development by Transport Infrastructure

76. The six major transport infrastructure projects are:

1. Northern Metropolis Highway – It will facilitate east-west connectivity in the New Territories North between Tin Shui Wai in the west and Kwu Tung North in the east via San Tin;

2. Shatin Bypass – connecting Tai Po and Kowloon West …relieve traffic pressure on Tolo Highway;

3. TKO-Yau Tong Tunnel – …third road tunnel at TKO [for] TKO Area 137;

4. Hong Kong-Shenzhen Western Rail Link – Hung Shui Kiu with Qianhai [ed: long shelved but now back on track];

5. Central Rail Link – …12th railway line will connect Kam Tin in Yuen Long with Kowloon Tong via Kwai Chung, alleviating pressure on the carrying capacity of the Tuen Ma Line; and

6. TKO Line Southern Extension –TKO Line southwards to TKO Area 137,.

77. …Kwu Tung Station of the Northern Link will be commissioned in 2027, …the Tung Chung Line Extension, Oyster Bay Station and Tuen Mun South Extension commencing next year.

78. …projects under planning, including Route 11, Tsing Yi-Lantau Link and Tuen Mun Bypass, as well as improvements to Lion Rock Tunnel. 

Property 101: Misguided policies push up home prices

It’s a well-known fact that Hong Kong housing keeps scaling new heights. Just how this phenomenon is felt by the people can be quantified by looking at terms such as “Expensive Flats” in Google Trends, which indicates that home prices are at their highest since 2011. While everyone blames this on low interest rate and low supply, this article highlights another more significant yet overlooked factor – the dysfunctional structure of Hong Kong’s housing supply.

Lost opportunity in housing reform – policy intervention even worse now

One of the main reasons that the last Chief Executive undertook reforms in public housing infrastructure was that the government had no duty to subsidize property investing. It is a shame that the government perpetuated the high land price policy after the abolition of Home Ownership Scheme (HOS), preventing developers from speedy replenishment of their landbanks at reasonable prices; this led to a shortage of private sector supply to relieve the high home prices we see today. It was also a gross oversight that the previous government failed to set an upper limit for public housing (just like the Financial Secretary targeting public spending at below 20% of GDP) to prevent welfare housing sector from expanding endlessly. These two policy mistakes are fatal errors in the reform of housing policies, we may be decades away before a similar opportunity presents itself again.

The combination of its planned economy philosophy and huge political pressure emanating from the high home prices has led the current government to aggressively grab land that would otherwise be building private sector housing. Meanwhile, the ever lengthening Public Rental Housing (PRH) waiting list and massive over-subscription in HOS sales reinforced in the minds of the administrators the justification of ever deepening government intervention in the housing market. As of now, private housing supply barely exceeds public housing supply by 10,000 units over the next five years [Figure 1], but will likely be significantly overwhelmed by public supply in the not too distant future. Amongst global housing markets, Hong Kong must rank high in terms of the degree of government intervention and participation in housing supply.

Figure 1: A possible completion pipeline in the next five years

Government exit needed to restore supply balance

At the top of the housing cycle, when the government diverts tax payers’ money to subsidise public housing, the well-ordered equilibrium of the market is broken – when faced with shortage of private land on the one hand, and irrational, price insensitive competition of low end government housing (HOS competes in the sales market while PRH competes in the rental market) on the other, developers have no choice but to focus on the luxury segment. This polarisation of the market (public housing flooding the low end coupled with private housing migrating to the super high-end) seriously damages the structure of the market, turning a smooth housing ladder into fragmented and disjoint segments with administratively imposed high barriers to overcome between each micro segment. The biggest victim of this tragedy is none other than the middle class, who can neither qualify for the welfare paid by their tax money, nor afford the private housing whose prices the policy helped elevate.

In light of this, the government should suspend any further public housing plans and sell all public lands into the private market. When there is adequate private land supply, developers would certainly sell earlier and build faster, thereby bringing the whole housing supply chain forward. In so doing, a more competitive private market emerges, relieving upward pressure on home prices [Figure 2].

Figure 2: By combining all public land into private market, private housing supply rises by 112%

Economics 101: more supply leads to lower prices

What the housing mandarins fail to realise is that the “home price” people refer to is private housing prices, because the public housing sector lacks a mature, open, and liquid system to reflect the balance between supply and demand. As long as there is sufficient supply in the private market, there is no need for a visible hand to set artificial prices or otherwise interfere in market behaviour.

In addition, the pool of capital that can address private home prices and consequently influence the public’s perception towards housing market has never been natural end-users of public housing. Therefore, basing public housing policy on private housing levels is strangely, barking up the wrong tree – the objective outcome of the current housing policies is one of grabbing private land, reducing private housing supply, and pushing up private home prices.

When public housing has reduced private supply, the same pool of capital is now forced to compete on a reduced allocation – how could each private unit not see higher prices as a result? To give a simple example, starting with a total 100 home buying dollars and total supply of ten units, then government reduces private sector to only four units (government policy targets 60% market share), higher home prices ($25/unit) inevitably result [Figure 3].

Figure 3: Public housing takes away private supply, thereby lifting average price in the market

On the contrary, if all public land is returned to private housing, the number of private units will increase by 1.5 times, while average home price would fall by 60% to $10 a unit [Figure 4]. This way, not only private home prices become much more affordable, the political pressure due to high home prices also disappears.

Figure 4: When left to market, private housing supply rises and prices must fall

It is obvious that by stepping back from interventionism, the market will function as intended, and home prices will be much more affordable. What is more, the people of Hong Kong will be able to buy the right product that meets their needs, at prices they can afford. This is a far more humane psychological condition than the current lottery mentality, dreaming of receiving government handouts, and in many cases trying to hide assets/income or giving up well-paid and promising careers to qualify for housing welfare. This vastly opposite mentality between masters of own destiny and low-esteem welfare recipient is what determines the future of Hong Kong.

Rear-view mirror policy making is counterproductive

The public housing machinery that the former Chief Executive failed to finish overhauling is characterised by a minority of officials determining the fate of a massive asset class, while these bureaucrats lack market experience, and have difficulty responding to market signals in a rational way. This situation is made worse by welfare politicians high jacking housing policy to extract maximum electoral benefits instead of serving the needs of the people. It is unsurprising that the sphere of housing policy has become a playground for vested interest groups.

What this set up leads to is that public housing supply is ramped up the most when the ducks quack the loudest, usually at the top of cycles. The government policies at these cycle peaks also inevitably attract home buyers/renters which are most lacking in analytical abilities, least able to afford, and most unequipped to fend off the risks of a subsequent price collapse. Thanks to the most ill-timed government subsidies, these people always buy homes at the highest prices with the highest leverage.

Once the property market has corrected, the peak of public housing completion arrives on cue to worsen market vacancies when it is already at its worst [Figure 5]. In other words, government behaviour not only increase home price volatility, it leads to higher construction costs, and lures the greedy seeking advantages into welfare traps, if not worse – negative equity.

Figure 5: Public housing policy lags behind markets, raises price and supply volatilities

Abandon intervention and return free markets

At the opposite end of the spectrum, private developers must meet market demands at every turn in order to maximize profits. They will always increase supply when price rises, even adding supply at a faster pace than the change in price (because they are flexible in advancing or delaying presales). When the market corrects, developers readily cuts prices and reduce supply, because they do not have administrative inertia or procedures to deal with. This results in lower price fluctuations [Figure 6: Blue line move faster than red line, thereby reduces the steepness in the slope of red line] and fewer slogan chanting, ambulance chasing welfare politicians.

 

Figure 6: Private market adjusts supply and prices rapidly, avoids uncertainties of policy interventions

The naked and large scale government meddling in housing supply not only contradicts basic economic principles, it also creates unfairness and wastes limited public resources. The above analysis shows clearly the contrast between private oriented and planned economy approaches to housing administration. We leave you with a final chart of actual completion data – almost every time home prices reaches a peak, the proportion of public housing completion surges [Chart 1], proving beyond doubt that our highly paid mandarins make the same mistakes at the same points in every property cycle. The sad truth remains, that we will be sure to witness another public housing tragedy in Hong Kong over the next 4 years.

Knowing that history repeats itself, the only and the right thing the civil servants should do is to humbly acknowledge that the market knows far more than any small group of smart individuals. Rather than arbitrarily thrust administrative coercion to achieve exactly the opposite, why not just step aside and let the people exercise their inborn economic liberties, thus reducing harm brought to the people and their wellbeing.

Chart 1: Public housing supply peaks 4 years following every property cycle peak – demonstrating that the road to hell is paved with good intentions

This article was researched and written with significant input from Mr Tom NG Chun Wai, whose contribution is greatly appreciated.