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Analysis: HK property measures not enough

By SONIA KOLESNIKOV, UPI Business Correspondent

SINGAPORE, Nov. 14 (UPI) -- Hong Kong has unveiled nine new initiatives to revive its ailing property market, but whether the medicine, which offered few surprises, is strong enough to improve the patient is far from certain. Indeed it could create new ailments as it starves the budget of a source of expected revenues.

On Wednesday, the Hong Kong government announced a package aimed at stabilizing property prices, restoring public confidence and ultimately expediting the economic recovery. "The measures are aimed to restore public confidence in property ownership, and in the end to speed up the recovery of our economy," said Hong Kong leader Tung Chee-hwa.

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The government will stop the sale of land auctions until the end of 2003, thus canceling the two planned for the current fiscal year, while the two government-controlled railways, the MTR Corp. and the Kowloon-Canton Railway will have a moratorium on new property projects along their lines until the end of 2003. This latter announcement was the only surprise of the package.

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The government also proposed to stop building and selling subsidized Home Ownership Scheme flats at the end of 2003 for an indefinite period, while those flats that are completed or under construction will be disposed of through market-friendly means. Instead, the government will try to encourage demand by providing housing loans to eligible homebuyers.

Most analysts believe the properties measures, mainly supply-driven, will have little impact on property prices in the near term, apart from a temporary boost, though it will help property developers. Moreover, the implications of the package on the ballooning budget deficit could outweigh the positive ones.

On Thursday, Financial Secretary Antony Leung acknowledged that the lack of revenues from the sale of land will cost U.S. $2.2 billion alone this year. This at a time when the budget deficit in the first half of the fiscal year already stood at $9.1 billion, 57 percent higher than the government's own target for the full year.

"Unfortunately the measures to reduce government land sales and other concessions may exacerbate the substantial fiscal deficit," said John Bailey, director of Standard & Poor's.

The new package of property stabilization measures announced by the government was in line with market expectations, said Pieter van der Schaft, a Hong-Kong based analyst with Barclays Capital. "It again provided a rehash of measures designed to curb property supply, as such again extending a palliative to Hong Kong's powerful property lobby. The package, however, again falls short of painful, but necessary reforms, which would boost Hong Kong's long-term competitiveness as well as lead to a swift clearing of the supply overhang in the property market," van der Schaft said.

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Bailey added: "The steps announced will not have any immediate impact on the supply of private sector properties, which has exceeded demand over recent years. Although there may well be a modest boost in demand for lower-priced property, it will be some time before the existing market overhang will be absorbed, and it will take several years before the cutback in supply in government land impacts housing production levels."

Analysts argue that property affordability is not an issue given the very low level of mortgage rates (2.5 percent for floating rate mortgage). The lack of appetite reflects the rising job insecurity, with unemployment rate at 7.6 percent, and general expectations for a further slide in property prices. Property rental rates have also remained under downward pressure due to a shortage of tenants and rising vacancy rates with many tenants switching to home-ownership.

"As 65 percent of households is reportedly able to afford a property at present (as compared to a home-ownership ratio of only 30 percent), the low level of property transactions at present suggests that prices have not declined far enough to clear the market of over-supply," van der Schaft said.

Eva Lee, an analyst at ING Barings, said, "We believe the new measures are positive but not likely to have a substantial effect in the near term. Until domestic economic conditions recover and the overhanging supply clears, it is still too early to expect property investors to enter the market."

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Lee also noted that rental yields have stayed higher than deposit rates for months, but have still failed to attract an influx of property investors.

Although Hong Kong property prices have fallen 65 percent from their 1997 peak, some analysts argue they have more room to fall.

"We continue to believe falling property prices are a necessary, albeit painful, adjustment to Hong Kong's cost structures in the absence of any monetary policy flexibility and do not expect the latest set of measures to stop or reverse the downward trend," Robert Fong, a Citigroup economist, wrote in his daily research note.

A further decline in land and property prices -- in particular also for commercial use -- would lead to a further lowering of Hong Kong's cost base. In turn, this could alleviate a further relocation of low value-added services and manufacturing activities across the border, van der Schaft said.

Amid this gloom, one research house stood out. UBS Warburg told its clients in a research note that the measures announced to restore buyer confidence "will start a multiyear rise in home prices (+40 percent in two years) and deliver a 60 percent upside to developer shares in one year."

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