Here are three data points that'll help.
Hong Kong property stocks have corrected 12% ytd and are currently trading at a 45% discount to NAV and at 0.6x P/B. This contrasts sharply with the physical market’s 10.7% rise ytd.
According to a research note from Barclays, at some point, the divergence between physical property and property stocks should converge. So which is right? Are the Hong Kong property stocks offering value or a value trap?
Barclays believes three key data points could re-shape home buyers’ outlook from bullish to bearish. These are: 1) CentaCity Leading (CCL) index drop of 3% or more; 2) rise in unemployment; and 3) timing of first interest rate increase.
Barclays noted that people are looking for evidence to validate or rebut the negative headlines. Over the past quarter, in addition to the stock market correction, home buyers had to contend with news of price cuts and deposit forfeitures.
Despite these negatives, home prices have continued to rise (up 2.2% in 3Q and 10.7% ytd). With a growing doubt about the sustainability of the current housing cycle, Barclays believes home buyers will look for evidence to validate or rebut the recent negative headlines.
Here's more from Barclays:
We believe three data points could reshape home buyers’ view from bullish to bearish.
Catalyst #1: If the CCL were to fall over 3% or decline for three straight weeks: Since the start of 2013, the CCL home price index has remained resilient in the face of new property cooling measures. During this time, the largest cumulative decline was only 5.1% and the longest downward streak was five weeks. For home buyers to consider any adjustment as more than a blip, we believe the threshold would have to be a cumulative correction of more than 3% or more than three weeks of consecutive declines.
Catalyst #2: If overall unemployment rate rises: Hong Kong’s unemployment rate has been hovering around 3.3% since 2011. With nearly full employment, we believe home buyers have taken income growth for granted and this has been an oft-cited reason why rate hikes can be mitigated. However, with the overall economy now slowing, if unemployment begins to tick up, we believe home buyers should turn more cautious. After all, if one does not have a job, it doesn’t matter how low interest rates are.
Catalyst #3: Rise in US interest rates: Although a rate hike is the obvious catalyst, market views are still split. Some argue that the first rate hike could be positive as it would remove a potential overhang. We disagree. As shown in previous rate hike cycles, the worry about the first rate hike would simply be replaced by worries about the second, third, fourth rate hike, and so on. It would not be until the end of the rate hike cycle is in sight that home buyers re-engage, provided that it is affordable.
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