HONG KONG (Reuters Breakingviews) - Hong Kong's property crash may hurt less this time around. The world's least affordable housing market is certainly heading for a major correction, and the last one was brutal: The Asian currency crisis and SARS epidemic combined to push prices down 69% from 1997 to 2003. But resilient local demand, a land shortage, fewer speculators and higher down payments might pad this downturn.
Official third-quarter data due later on Friday will confirm the Chinese-ruled city is in its first recession in a decade. Months of violent political unrest – which has escalated this week with blocked transportation routes, tear gas fired in the central business district and an elderly man killed by a brick – and a U.S.-China trade war have battered the financial centre's retail, tourism and private sectors. Economists at ING reckon Hong Kong's economy will shrink by as much as 5.3% in 2020.
Real estate has held up surprising well. Private home prices have dipped roughly 3% since anti-government protests kicked off in June, but are up since the start of the year. Hints of trouble are emerging: a prime residential location was recently auctioned to developers at a 27% discount to a similar, adjacent plot of land sold earlier in the year, according to the South China Morning Post. The aggregate value of underwater residential mortgage loans increased to HK$330 million ($42 million) in September, compared with HK$3 million in June.
It's never a good sign when powerful developers like $23 billion Henderson Land Development <0012.HK> turn cautious. The Hang Seng Property index has slumped 7% this week. Residential prices could fall by up to a fifth next year, JLL analysts estimate.
Yet the city's acute land shortage has worsened over the past decade, which means local demand for affordable housing could help prop up prices. Government policies, including increased stamp duties and a vacancy tax, have fended off speculative buyers who are usually the first to panic-sell when prices weaken.
Moreover, unlike in 2003 when the sudden drop in home values pushed more than 100,000 households into negative equity, higher down payments and stricter mortgage requirements have made it harder for buyers to over-leverage themselves. This may make the difference between economic discomfort, and outright catastrophe.
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