News Alert: Long-awaited policy easing finally materialises
- All demand-side management measures removed to stabilise the residential market
- Hong Kong Monetary Authority relaxed interest rate stress testing requirement
- Developers to expedite launch of new projects with increased transaction volume expected
- But flexible pricing strategy should continue, given higher new home supply and increased unsold inventory
- Forecast home price to fall 5% in 2024
- Further upside on property developers, SHKP preferred
In the Budget Speech, the government announced to remove the Special Stamp Duty (SSD), Buyers’ Stamp Duty (BSD), and New Residential Stamp Duty (NRSD) for residential properties with immediate effect. After a short-lived recovery led by the reopening of the border with Mainland China in 1Q23, home prices fell 13% since then, and now 24% off the previous highs in Aug-21. Secondary market transaction volume fell 7% y-o-y to 29,687 units, the lowest in more than two decades, as housing demand was subdued given the prolonged interest rate upcycle and the slower-than-expected post-pandemic recovery of Hong Kong and China’s economy. Therefore, we agree with the government that such cooling measures are no longer needed.
The removal of the NRSD, which is equivalent to 7.5% of the property value, should help gradually revive investment demand. In 2023, residential rents rose c.7%, reflecting solid accommodation demand among locals, overseas students, returning expatriates, and incoming talent. This, coupled with the price correction, pushed up the residential rental yield to >3% currently, which is expected to further improve in 2024. On the other hand, we forecast the prime rate would drop to 5.625% by end-2024 along with the US Fed Funds Rate cuts. This should lead to a lower effective mortgage rate, which currently stands at 4.125%. With the rental carry turning less negative on one hand and the removal of the NRSD on the other, we believe that property investors would gradually re-enter the market.
With the expected improvement in market sentiment, some prospective homebuyers would no longer adopt a wait-and-see approach. We therefore expect developers to expedite the launch of new projects following the policy easing to tap into the pent-up demand. Nonetheless, we forecast the number of new residential units in 2024-26 would average 19,600 p.a., 10% higher than the average in 1996-2023. Of this, only 9,400 units, or 16% of the total, have been pre-sold due to the slow take-up in the primary market over the past two years. Launched and unsold inventory has surged c.24% y-o-y to 22,936 units in Dec 23, of which 14,954 units, or c.65% of the total, are completed. Given the increased unsold inventory and rising new home supply, projects will maintain flexible pricing to move sales. We forecast home prices would be 5% lower in 2024 (previously: Down 5%-10%). Market activity, especially in the primary market, is expected to rebound in the coming three months.
However, since no price rebound is expected in the near term, we do not foresee any re-emergence of speculative demand, even with the removal of the SSD. On the contrary, some existing homeowners with financial difficulty may offload their property via the secondary market if needed, as no SSD is now required.
The cancellation of the BSD should encourage more overseas buyers, mainly Mainland Chinese, to purchase homes. Since the introduction of the stamp duty suspension for eligible incoming talent in Oct 23, over 500 applications have been approved, which serves as a testament to their housing demand. In 2023, >140,000 applications were approved under various talent admission schemes, with c.100,000 incoming talents already having arrived in Hong Kong. Moreover, the newly unveiled Capital Investment Entrant Scheme aims to attract affluent immigrants who could be potential purchasers of luxury homes. These new immigrants are set to play a key role in driving growth in residential demand in the medium term.
In addition, since the US rate hike cycle is likely to come to an end, the Hong Kong Monetary Authority (HKMA) has suspended the interest rate stress testing requirement for property mortgage lending that assumes a 200bp rise in the mortgage rate. This should increase housing demand among marginal buyers who were not able to fulfil the stress testing requirement. Besides this, the HKMA relaxed the mortgage lending rule. For self-use residential properties, the loan-to-value (LTV) ratio increased to 70% for properties valued at HK$30m or below, and 60% for properties valued at HK$35m or above. The easing of down payment requirements should provide luxury home buyers with greater financial flexibility. For mortgage loans assessed based on the net worth of mortgage applicants, the maximum LTV ratio will be adjusted from 50% to 60%.
Meanwhile, property developers are trading at a 60% discount to our assessed current NAVs on a weighted average basis, 2SD below the sector’s 10-year average. The policy easing should facilitate the launch of new projects, enabling developers to unlock their NAVs. This should provide a further upside on their stock. Within the sector, we like SHKP for its strong execution and attractive valuations.