Hong Kong Land Sale Raises Worry of a Bubbl By Jonathan Cheng and Aries Poon Wall Street Journal 02-23-2010

Hong Kong Land Sale Raises Worry of a Bubbl By Jonathan Cheng and Aries Poon Wall Street Journal 02-23-2010

Hong Kong Land Sale Raises Worry of a Bubble
By Jonathan Cheng and Aries Poon
The Wall Street Journal
February 23, 2010

Strong results in a Hong Kong government land auction are the latest sign that the city's real-estate market is surging higher after a brief lull, as government officials here and elsewhere in the region grapple with how to cool off overheating property prices.

On Monday, blue-chip developer Sun Hung Kai Properties Ltd. agreed to pay 3.37 billion Hong Kong dollars (US$434 million) bid for a 130,000-square-foot site in the suburbs of Hong Kong. That price, reached after an intense bidding session, was above the average US$362 million forecast of six surveyors and analysts polled earlier by Dow Jones Newswires, and was 69% above the reserve price of US$258 million.

The big purchase came just after Sun Hung Kai sold 900 apartment units in a major new residential complex over the weekend for a total of US$541 million. The units, ranging from 400 to 1,400 square feet, sold for about US$700 per square foot, a steep premium to other apartments in the area. That indicates the mass-residential market could be vulnerable to the speculation that led to a jump of about 50% in Hong Kong's luxury-apartment prices last year.

Sun Hung Kai is Hong Kong's biggest developer with a market capitalization of about US$34 billion.

Around the region, easy credit and ample liquidity is fueling fears that real-estate prices may be rising to irrational levels.

In China, where by some official measures home prices have risen as much as 25% in the past year and land values have doubled, officials are keen to tamp down the market. Beginning Thursday, the People's Bank of China will require banks to hold more cash in a bid to clamp down on excessive lending.

Last week, Singapore's government made an attempt to "temper sentiments and pre-empt a property bubble" by imposing a tax on those who flip properties within a year of purchasing them while capping residential mortgages to 80% of a home's value, from 90%.

In spite of cooling measures instituted last autumn, Singapore's government said "there are recent signs that [the property market] is starting to heat up again," noting that the number of primary-home sales in the city-state last month was triple that of the month before, accompanied with a sharp price increase that outpaced previous rebounds.

"There is a risk that the market could overheat in the next few months, fueled by low global interest rates and positive sentiments associated with the economic recovery," the government said, pledging to take further action if required later. Singapore also said it would boost housing supply.

Unlike China and Singapore, however, Hong Kong has little control over interest rates because its currency board system, which pegs the local currency to the U.S. dollar, forces it to import U.S. monetary policy.

Instead, says Nicole Wong, a property analyst with CLSA Asia-Pacific Markets, there is little Hong Kong's government can do about what she describes as a full-blown housing bubble in the city's mass-residential markets.

"Hong Kong property buyers have been in a prolonged low-interest-rate environment, and now they're behaving like drunken drivers on the road—they don't think about consequences," Ms. Wong says, estimating that prices have increased 5% this year. While speculative activity has been subdued, she argues the public is "overstretching" itself, convinced that "prices will go up forever."

The government has tried its best to tamp down overexuberance in recent months. Chief Executive Donald Tsang has said the government would monitor property prices and fine-tune its land-sales policies if necessary. The Hong Kong Monetary Authority also told banks late last year to raise the standard down-payment ratio on luxury properties to 40% from 30%.

Keith Yeung, a property analyst at Mirae Asset Research, expects Hong Kong's financial secretary to announce a policy response Wednesday, when he delivers Hong Kong's annual budget. "The government is now under tremendous pressure to intervene in the Hong Kong residential market," Mr. Yeung says.

Not everyone is worried about home prices. Kelvin Lau, a Hong Kong-based economist with Standard Chartered Bank, says he doesn't see a bubble, pointing to low levels of speculation and an official mortgage-debt-servicing ratio of 36.4% as of last autumn, lower than Hong Kong's 20-year average of 52.6%.

Alva To, head of consultancy for brokers DTZ in Hong Kong, says the participation of a broad range of developers in Monday's auction, and the "very expensive" auction sale price, were signs that prices could continue to spiral upward. Mr. To isn't worried yet, however: "The public can still afford this, because interest rates have been as low as 0.7%."


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