VZCZCXRO8846
PP RUEHCN RUEHGH RUEHVC
DE RUEHHK #0191/01 0300817
ZNR UUUUU ZZH
P 300817Z JAN 09
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 6791
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHIN/AIT TAIPEI 0183
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 000191 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/IFD/OMA, TREASURY FOR OASIA WINSHIP 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV HK
SUBJECT: HONG KONG'S PROPERTY MARKET LOOKS BAD, BUT HK HAS 
SEEN WORSE 
 
¶1.  Summary: Hong Kong's property market dropped sharply in 
2008 as sales of all types of building units fell by more 
than 20 percent from 2007.  Property remains an important 
component of Hong Kong's economy -- for many Hong Kong 
residents, property is a primary store of wealth, and taxes 
on property transactions are a major source of government 
income.  Revenues will fall as land sales drop off, but a 
sizable fiscal surplus from previous years will help cushion 
the blow.  While analysts are not optimistic about the 
prospects for 2009, most agree that prices will not fall by 
as much as during 1997-2003 when they dropped by 60 percent. 
Rising prices for property stocks and a return to more normal 
transaction levels will be a good indicator that market 
confidence is returning and Hong Kong's economy is headed for 
recovery.  The Hang Seng Property and Construction Index is 
down sharply over the last six months, a trend that has 
continued into 2009, suggesting that optimism is still in 
short supply.  End summary. 
 
=========================================== 
HK Property Transactions Near All-time Lows 
=========================================== 
 
¶2.  The global financial crisis is taking a serious toll on 
Hong Kong's property market.  Despite record prices for 
luxury properties and near-record transaction volumes in the 
first six months of 2008, both transactions and prices 
dropped sharply in the second half of the year, leaving the 
market down over 20 percent for the year.  Hong Kong's Land 
Registry reported 113,298 transactions in 2008, down 22.2 
percent from 2007 while the total value of transactions fell 
by 21.4 percent to HKD 413 billion (US$53 billion).  In 
November 2008, fewer than 3,800 residential and 
non-residential building units changed hands in Hong Kong, a 
level not seen since the early 1980s.  December transactions 
were up slightly to 5,437, but still far below the normal 
range of 8,000-10,000 transactions per month.  Local press 
reports 4,706 properties changed hands through January 22, 
with less than 10 transactions taking place during the 
typically slow Lunar New Year holiday (January 24-28).  The 
peak season for the Hong Kong property market is normally the 
two months after the Lunar New Year. 
 
¶3.  After luxury property prices hit record levels in the 
first half of 2008, prices for all classes of property have 
fallen sharply.  Prices for luxury properties (over 160 
square meters/1440 sq. feet) have fallen by 40-50 percent, 
while even the smallest apartments (under 40 sq. m/400 sq. 
ft.) have seen prices drop by 15 percent.  Rents for 
residential and commercial property are also beginning to 
fall. 
 
============================================ 
Falling Prices Mean Falling Revenues for HKG 
============================================ 
 
¶4.  The fall in transaction volumes and prices is bad news 
for the Hong Kong Government (HKG), which relies on stamp 
duties on property transactions for a significant part of its 
revenues.  The Hong Kong government owns all land in Hong 
Kong, but issues tradable leases which can extend for long 
periods, typically 75-99 years, and are normally renewable. 
The government then charges duties on property sales and 
zoning conversions.  In  past years, stamp duties on property 
transactions have accounted for as much as 30 percent of 
total government income but land sale reforms implemented in 
2004 to restrict the supply of new property on the market 
make it unlikely that stamp duty income will account for such 
a large percentage of government revenue in the future.  In 
FY2007-8, revenue from all stamp duties, including both 
equity and property sales, was HKD 50 billion (US$6.4 
billion) and accounted for approximately 17 percent of total 
government revenue.  Hong Kong's 2008-9 fiscal year will end 
on March 31, 2009 and will include several months of buoyant 
property transactions, mitigating the negative impact on 
government revenues for this year.  Hong Kong will also 
benefit from the accumulation of large fiscal surpluses over 
the past several years, making it relatively well positioned 
to carry out ambitious plans to increase government spending 
on infrastructure and social programs in the next two years. 
 
======================================== 
Bad Market, but Hong Kong has seen Worse 
======================================== 
 
¶5.  As difficult as the current market may be for homeowners 
and the government, prices have not yet fallen as much as 
 
HONG KONG 00000191  002 OF 002 
 
 
they did in 1996-1997.  At that time, the confluence of a 
bursting property bubble, a regional financial crisis, and 
government policies that encouraged additional building even 
as the market slipped forced Hong Kong property prices down 
by 60 percent for all classes of property.  Many mortgage 
holders ended up owing far more on their property than its 
current valuation.  Despite large numbers of home buyers 
ending up "under water," default rates in the post-97 period 
in Hong Kong were extremely low - less than three percent at 
the peak.  Observers attribute this low default rate to the 
high down payment requirement (30 percent) for most mortgage 
holders, cultural norms that discourage default, and the 
existence of family and community support networks to help 
home owners make their payments.  Ten years later, these same 
factors are likely to keep Hong Kong's non-performing 
property loans to a minimum.  The dream of home ownership 
remains strong in Hong Kong.  Sixty percent of Hong Kong 
residents live in their own privately owned property.  Thirty 
percent still live in public housing, while the remaining ten 
percent rent from private landlords, according to Shih 
Wing-ching, Chairman of Hong Kong's largest real estate 
agency, Centaline.  For many in Hong Kong, their home is 
their primary investment, he said. 
 
¶6.  Analysts agree that the current fall in property prices 
is unlikely to be as bad as the late-90's in part because low 
and mid-range property prices never reclaimed the lofty 
heights of that bubble.  Developers also have insulated 
themselves from the decline in housing prices.  Ten years 
ago, many property developers in Hong Kong were highly 
leveraged and were forced to put properties on the market for 
any price, just to generate cash flow.  Today, the major 
developers in Hong Kong have much lower gearing ratios (i.e., 
less debt) and have diversified into rental and commercial 
properties that generate a healthy stream of income.  The 
HKG's application list system, which requires property 
developers to file an application to develop a parcel of land 
and then win the rights at auction, slows the pace of new 
properties coming on line, keeping supply tight and property 
prices high.  In addition, Hong Kong developers have expanded 
into projects in other economies, including mainland China, 
where they have applied the lessons of low gearing and 
diversified income streams learned during the Asian Financial 
Crisis.  Hong Kong analysts expect Hong Kong property 
developers will fare better in China than their Chinese 
counterparts, many of whom are reportedly highly leveraged. 
 
============================================= 
Property Indicator Suggests Shorting Optimism 
============================================= 
 
¶7.  Hong Kong asset prices are historically extremely 
volatile, in part due to the open nature of its economy and 
the Hong Kong dollar's link to the U.S. dollar, which forces 
Hong Kong to adopt interest rates closely aligned to U.S. 
rates.  Low U.S. interest rates can quickly lead to bubbles 
in Hong Kong.  Local property bubbles have historically 
tended to be supply driven, said CLSA Property Analyst Aaron 
Fischer.  As prices increase, developers tend to rush into 
the market.  In the past, the government has quickly released 
land for development, resulting in oversupply and falling 
prices.  In contrast, the current downturn is demand driven, 
he said.  The application list process has limited the supply 
of new properties on the market to just about 10,000 per 
year, as compared to 25,000-30,000 per year in the late-90's. 
 Given the nature of the current property slowdown, there is 
little the Hong Kong government can or should do, he said. 
When consumer confidence returns, property prices will 
recover rapidly, said Fischer. 
 
¶8.  Both prices and transactions can be an accurate, if 
lagging, gauge of market sentiment in Hong Kong, according to 
LIM Advisors Director Peter Churchouse.  Both will respond to 
changing sentiment, however, property stocks are an even 
better indicator and can be expected to respond quickly to 
increased optimism, said.  The Hang Seng Property and 
Construction Index is down 45 percent over the last six 
months and ten percent for the year so far, suggesting that 
optimism is still in short supply. 
DONOVAN