08/09/2017
By: Mr Simon Smith,Head of Research & Consultancy Savills Hong Kong
/ Simon heads Savills Research & Consultancy with responsibility for regional research services, covering the property markets of Greater China and the Asia-Pacific region. He has over 20 years’ experience of Asian real estate research and consultancy and is based in Hong Kong. As Head of Research, Simon has developed financial appraisal models and benchmark indices as well as a range of publications suited to the needs of investors, developers, landlords and occupiers.REMEMBERING 1997 – IS ANOTHER PROPERTY CRASH POSSIBLE TODAY?
Hong Kong recently marked the 20th Anniversary of the 1997 Handover of the territory from Britain to China and thoughts also turned to the Asian Financial Crisis which unfolded in the same year.
What began in Thailand with the collapse of the Thai Baht soon spread to elsewhere in the region, including Hong Kong. A speculative attack on the Hong Kong Dollar peg resulted in higher overnight interest rates and a falling stock market. It was ultimately a war which the government won but other factors compounded uncertainty in the property markets including tighter lending conditions, higher interest rates and a pledge by the new administration to dramatically increase the supply of residential apartments. At a time when prices were at record highs, affordability at record lows and speculation was rife, greed quickly turned to fear and office, residential and retail prices fell 71%, 60% and 52% respectively from 1997 to 2003.
The question today is whether conditions mirror 1997 and we are faced with an imminent property crash of a similar magnitude. Some data certainly harks back to the mid-90s; record high prices, poor affordability (measured by the ratio of average prices to household incomes) and the prospect of higher supply levels alongside elevated interest rates over the next few years. So will we see a property price correction of a similar scale to the 1997 to 2003 period?
Despite the parallels, other areas of the market still look quite robust, real interest rates remain in negative territory, gearing levels are conservative, supply levels will remain constrained for many years, liquidity is plentiful and even the banks have been hardened to better resist any future credit crisis. Government has also introduced a slew of measures to discourage overseas buying, contain rising prices, moderate lending and curtail the speculative excesses of the past.
Based on the fundamentals then, it is difficult to make a case for a sudden, sharp correction in values. A greater likelihood is that values will soon peak as we complete a 14th year of price rises followed by a period of relative stability. As for a crash, in the past those have been brought about by events beyond these shores and by weaknesses which no one saw or predicted. Today, the most often cited cause for concern is the rise of non-bank financial intermediaries operating beyond government control, but at least these risks have been identified and are widely debated. If the past is anything to go by, it’s the “unknown unknowns” which should keep us all awake at night.
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