Can We Substain An Annual Supply of 30,000 New Units from the Private Sector?

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border-top:1px solid #393939; clear:both; display:none; width:100%!important; position:relative; z-index:999999!important; height:90px!important"> <div class="adCenterClass" style="display:block!important; overflow:hidden; width:916px;"> <div id="footerAd_container" style="display:block!important; float:left; width:728px"> <iframe id="lycosFooterAdiFrame" style="border:0; display:block; float:left; height:96px; overflow:hidden; padding:0; width:750px"></iframe> </div> </div> </div> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" height=55 BGCOLOR="#339900" TEXT="#080000"> <div> <FONT SIZE="4" COLOR="#FFFFFF" FACE="Arial" ><B>The Jim (Dream) Could Never Come True</b></FONT><B>     </b><B>|</b><B>   </b><A HREF="index.htm" TARGET="_top" TITLE="The Jim (Dream) Could Never Come True"><U><B> Home </b></U></A></div> <div> </div> </td> </tr><tr> <td valign="top" height=425 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <I><B>Can We Substain An Annual Supply of 30,000 New Units from the Private Sector?</b></I></div> <div> <B>18th May 1998</b></div> <bR> <div> The residential market is increasingly thwarted by bad news: rising unemployment, ample new supply and the most threatening of all, the banking credit squeeze. All these spell a withering purchasing power and so the activity in the secondary market is virtually came to an grinding halt.</div> <bR> <div> Banks are more wary of the swelling bad property loans and estimating the damages caused by the defaulting owners who have been made redundant. Developers rush to offload their large stocks and find that the number of buyers is rapidly diminishing.</div> <bR> <div> In the last few months developers` properties took up most of the sales activities. Existing owners are suffered from the unwavering price cuts from the developers. Despite slashing price by 30 to 40%, they still couldn't compete. Developers hold the key in offering more flexible payment options to lift the burden of 30% downpayment, which is much needed in today`s market.</div> <bR> <div> However, not all the developers` properties could fetch good market response, only those fits in the budget of first-time buyers with a price tag not more than HK$2.5 million, a typical 2-bedroom unit in N.T. of a gross area about 500 sq.ft. For larger units, developers are feeling the market strain. </div> <bR> <div> It is forecasted that more than 30,000 new units pending for sale this year. However, if the market activity is still dominated by the first-hand market without any signs of a recovery in the secondary market, I would have the reservation on the market take-up of all these new units.</div> <bR> <div> Demand forecast based on the population growth and previous transaction volumes would deny my argument. The number of 30,000 units is considered small when compared with more than 130,000 properties changed hands in last year. According to government statistics, we still have a strong housing demand as seen in the 8 times subscription rate in the recent sale of Home Ownership Scheme properties. </div> <bR> <div> However, a property boom was experienced in last year and we saw a great deal of buyers from the trade-up owners who were induced to sell their existing flats to realise capital gains and plough back the stakes in their new acquisitions.</div> <bR> <div> The total amount of new home mortgages in 1997 made by the banks according to Hong Kong Monetary Authority was valued at HK$ 256 billion. However, the total outstanding mortgage loan was only increased by HK$ 95 billion to HK$ 425 billion at the end of 1997 compared with HK$ 330 billion in 1996. The large part of the fund i.e. HK$ 161 billion went to repayment of the previous mortgage loans.</div> <bR> <div> <U>Comparison of Mortgage Loans between 1996 and 1997</U></div> <div> <TABLE BORDER="2" CELLPADDING="1" CELLSPACING="1" WIDTH="498" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 20 WIDTH="226"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="20" ALIGN="bottom" WIDTH="226" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=TOP WIDTH="62"><div> 1996</div> </tD> <tD VALIGN=TOP WIDTH="62"><div> 1997</div> </tD> <tD VALIGN=TOP WIDTH="123"><div> Increase</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 20 ><NOBR><div> New Home Loan Value (HK$ bn)</div> </NOBR></tD> <tD VALIGN=TOP WIDTH="62"><div> $151</div> </tD> <tD VALIGN=TOP WIDTH="62"><div> $256</div> </tD> <tD VALIGN=TOP WIDTH="123"><div> +69.5%</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 20 WIDTH="226"><div> Number of Contracts</div> </tD> <tD VALIGN=TOP><NOBR><div> 122,823</div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> 136,094</div> </NOBR></tD> <tD VALIGN=TOP WIDTH="123"><div> +10.8%</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 20 ><NOBR><div> Outstanding Mortgages (HK$ bn)</div> </NOBR></tD> <tD VALIGN=TOP WIDTH="62"><div> $330</div> </tD> <tD VALIGN=TOP WIDTH="62"><div> $425</div> </tD> <tD VALIGN=TOP><NOBR><div> +28.8%(<B>+$95 bn</b>)</div> </NOBR></tD> </tR> </TABLE></div> <div> Source: HKMA</div> <bR> <div> It was clear that the market in 1997 was buoyed up by a much active secondary market. The large transaction volume was caused by a multiplying effect of the movement in the existing ownerships. </div> <bR> <div> For instance, if a potential buyer buys his flat in the secondary market, instead of from the developers` first-hand market, then it would trigger a new demand from the original owner of the flat if he chooses to buy another flat for his new home. The counting of the  transaction figures would only be stopped when the final purchase is on the first hand market.</div> <bR> <div> Based on the above analysis, if the developers` properties snap up most of the interests of the first-time buyers or new capitals in the home market, it would not only erode the vibrancy of the secondary market, further sinking down the market activity, but also tighten up the banks` capital because existing mortgage loans could not be replaced. The contagion would hurt the developers as well when they have to sell more expensive properties, for which demand is mainly from the trade-up owners.</div> <bR> <div> As a result, I suspect that the market would have sufficient buyers for 30,000 new units in this year. At this point, I have not mentioned whether our underlying financial infrastructure i.e. the banking facilities could also support the addition of these units.</div> <bR> <div> If we assume that the average price of the 30,000 new units is at HK$ 3 million per unit, the total value would be HK$ 90 billion, almost equivalent to the net increase of the property loans by the banks in last year. This is an highly unachievable task considering the current credit squeeze in our banking sector unless we have other external funding sources. This figure has not included the secondary market activity and the sales from the public sector.</div> <bR> <div> To achieve the target for 30,000 new units, either the developers drastically cut their offers, which would definitely further backfire the secondary market and jeopardise the quality of the banks`mortgage assets, or build even smaller flats causing another housing problem in the future.</div> <bR> <div> This scenario unfortunately depicts a very gloomy outlook to our property market, then one would ask why should we set such an inflexible target without a thorough assessment of the market situation..</div> <bR> </td> </tr></table></body>