SECTOR FOCUS: RESIDENTIAL Prices are under pressure in Hong Kong, while values in mainland first-tier cities in China continue to rise. Thomas Lam reports

It was a year of government intervention in 2013 for Hong Kong and mainland China. While authorities introduced a series of tightening polices, home prices showed little sign of correcting. Residential markets in first-tier cities on the mainland even showed signs of heating. With continued cooling measures in Hong Kong, residential transaction volume and prices are expected to drop in 2014. In mainland China, since no further property market cooling measures were announced in the Third Plenary session of the Central Committee, it is expected that the Central government will enforce longterm radical cure to tackle the bubble.

With the launch of a series of regulatory measures, Hong Kong’s residential property market was quiet throughout the year. residential transaction volumes dropped from 81,333 in 2012 to 50,100 in 2013, a level even lower than the SARS-affected 2003.

On the demand side, buyer sentiment was suppressed by the implementation of special stamp duty, which was extended and intensified at the end of 2012, as well as buyer’s stamp duty and double-stamp duty in February 2013. On the supply side, primary project launch was delayed by the imposition of the residential properties (first-hand sales) ordinance in April. Sentiment in the primary market did not start to improve until some developers had adapted to the new rules and resumed their project launches with the offer of beneficiary packages and price cuts in the fourth quarter to offset the negative effects of stamp duty policies. Under the cooling measures, investors, especially speculators, as well as foreign and corporate potential buyers, were virtually screened out from the market, particularly in the first half of 2013, with local buyers the only source of demand.

The secondary market was more affected, particularly towards the end of the year, with the resumption of primary project launches. Despite plunges in transaction volumes, residential prices remained resilient, dipping only about 2% in 2013. More residential supply is expected in 2014, with around 18,000 new homes available for sale. new territories will be the focus, particularly Tai Po, Tseung Kwan O and Yuen Long. We expect transaction volumes to drop further to 45,000-50,000 this year amid continued cooling measures. Sales will continue to be dominated by primary sales, with beneficiary packages offered offsetting some impact of the cooling measures. Secondary sales will be further suppressed with primary prices being close to, or lower than, secondary prices in the locality and lowering valuation of second-hand units.

Buyers will continue to dominate the market, but investors will start to return to the market. With more developers offering incentives to offset special stamp duties, the proportion of Chinese buyers in primary projects is likely to grow from the current 5% to around 10%, while the proportion of corporate buyers is set to grow from 10% now to around 15%. Residential prices will be heading south in the coming few years on the back of increasing residential supply, but significant corrections are not expected amid a low mortgage-rate environment. The only uncertainty will be from the US – with tapering and interest-rate rises – but this is not expected until 2015 or 2016. Mass sector home prices might drop 10-15% in 2014 due to cooling measures and increased supply.

Luxury residential prices will be more resilient, dropping 5-10% in 2014. In the second half of the year there will be more notable falls, as the market is expected to be supported by the release of previously accumulated purchasing power during the first half of the year. In leasing, luxury residential rents could drop 5-10%, while the mass sector will be more resilient, with rents falling 0-5% amid strong demand for small-to medium-sized units. With no further property market cooling measures announced in november 2013 and the current policies only temporarily suppressing demand by restricting home prices and purchase, the Central government is expected to tackle the bubble through implementing a property tax, increasing land supply to prevent developers from competing for land with sky-high prices, and regulating bank loan policies to strengthen market mechanisms. Further cooling policies are unlikely in the short term.

In 2014, land in the core areas of first and second-tier cities will continue to be seized by cash-rich developers. Residential prices in first-tier cities will continue to rise. super-luxury home prices will be suppressed by decreased sales volumes. Primary sales will be more robust than secondary sales, with cooling measures continuing. Residential prices in second-tier cities will increase, but at a slower pace than first-tier cities. Some second-tier cities may see price corrections, such as Wenzhou and Dongguan with bubbles, while other cities may see price surges, such as Haikou, with robust speculation activity.

Thomas Lam is director and head of research and consultancy for Greater China at Knight Frank