Investors conscious of headwinds facing Hong Kong housing market

Scope for a relief rally seen.

It has been observed that Hong Kong home prices have corrected 5.92% over the past 12 weeks, annualizing a 23% decline.

According to a research note from Barclays, although current housing sentiment is very weak, Barclays’ recent US/EU marketing feedback suggests that investors are well aware of the headwinds facing the Hong Kong housing market.

With stock valuations pricing in a 26% decline in home prices and investors already negatively positioned, Barclays sees the scope for a relief rally should one or two events help soften the current very negative outlook.

Looking out to the next few months, Barclays believes this could come from Hong Kong potentially skipping one 25bps rate hike or some relaxation of the previous property cooling and macro-prudential measures – some food for thought.

Here’s more from Barclays:

Scope for a relief rally? Hong Kong home prices fell 1.1% last week and have now corrected 5.92% since 13 September 2015. If one were to extrapolate this trend, it would suggest home prices being down 23% in 12 months.

Although the local housing market is weak, anecdotal feedback from our two weeks of marketing in the US and Europe suggests that investors are already very underweight Hong Kong property stocks. With stock valuations indicating a 26% fall in 12 months’ time, and investors already negatively positioned, we see the scope for a relief rally should one or two events help to soften the current very negative outlook.

Something to soften the bearish narrative: So what are the catalysts that could help soften the current bearish housing sentiment? What if Hong Kong skips the first 25bps rate hike?

First, although Fed Funds futures suggest a 74% probability that the US Federal Reserve will hike rates this week, we should consider what if Hong Kong does not follow the first 25bps increase? While the Fed Funds rate has been cut 500bps since the pre-GFC level, Hong Kong’s prime borrowing rate and deposit rate have been cut by only 275bps and 225bps each. At the interbank rate level, 3M HIBOR has fallen 506bps versus 3M Libor’s 521bps. There may be scope for Hong Kong to skip the first 25bps rate hike.

Policy easing to soften the path of descent? Second, what about some policy easing? Nine months ago, one of the bull case arguments for Hong Kong property stocks was that the Hong Kong Government would not want to see home prices dropping significantly and, if it did, it would roll back the previous property cooling measures.

We believe government policy is dynamic and see the first threshold to trigger some policy relaxation being a 10% decline in prices. With the CCL now down nearly 6% from the mid-September peak, a policy response may not be far away.