- Home prices rose by 7%-15% in the first half of 2017 and sales volume surged to the highest level of this year so far, in April
- The hot sentiment aside, rising interest rates and default cases spelt caution for buyers
- In the investment market, all eyes were on the office sector after the government land sales received record high bids, and total considerations at year end may surpass the 2016 level.
Home sales as represented by Sales and Purchase Agreements (S&Ps - primary and secondary residential combined) rose to 7,060 in April, the highest level this year thus far, but fell back to 5,732 in May. Compared with the same period in Q1, the sales volume of the first two months of Q2 was up by 74%. The strong interest in homes supported the price growth: Price indices for selected popular developments rose by 7% year-to-date (YTD), and representative estates such as City One Shatin, Taikoo Shing and Residence Bel-Air recorded even greater growth of 10% to 15% respectively during the same period. Home prices still have room for further growth by another 5% in the second half of the year.
The chase for homes at historic high price levels prompted comparison between the market today and in 1997. However, Mr Alva To, Cushman & Wakefield's Vice President, Greater China & Head of Consulting, Greater China, said the market today is not as leveraged as two decades ago, mostly because of the low interest rate environment and the government measures which have greatly limited the scale of buyers' mortgage borrowing, resulting in a much lower affordability ratio today than in 1997.
"That said, the market today has its own risk factors. One is the increased proportion of primary home sales, from a monthly average of 25% in January to May 2016 to 28.2% in the same period of 2017. Primary home sales are heavily subsidized by developers and therefore do not reflect the true strength of the buying power. The second is that although interest rate remains low, it is on an upward trend, and further hikes in future could erode affordability. The recent default cases have already served to alert potential buyers to the risks ahead. We believe market activity will drop in the aftermath of the mortgage tightening measures, but prices will continue to increase though at a slower pace than in first half of this year," Mr To commented.
In the property investment market, 51 major transactions (each with a unit value of more than HK$100 million) were recorded in Q2 thus far, about half the level as in Q1, and the total estimated consideration dropped by 44% to HK$16.576 billion. Transaction volumes and amounts shrank in all sectors, except in the Office sector in which considerations rose by 3% despite a drop in deals by half.
Office properties have been an investor favorite, as office prices have picked up since 2015 thanks to rising rents and the positive outlook in the Hong Kong office market. However, the number of office transactions has been limited by the limited stock. In Q2, after the sales of the Murray Road and Kai Tak commercial sites for record prices set a new benchmark on the value of offices, there has been even greater interest in Grade A and Grade B offices, and vendors have become more aggressive. Mr Kenneth Yip, Cushman & Wakefield's Executive Director, Investment & Advisory Services in Hong Kong, commented, "We saw a general increase in asking prices of around 20% for Grade A offices after the government land sales, and more landlords started to look at the option of selling or upgrading their commercial properties to match the market trend."
"Looking ahead, we expect investors to remain active in the core office areas against a tight availability environment and a stable rental market. As more transactions of trophy assets are in the pipeline, the total consideration at year-end could break the record of 2016," concluded Mr Yip.
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