A double blow to property market creeps in

Before mid-August, the Hong Kong Interbank Offered Rate (HIBOR) peaked at 0.95%, but as of the 21st of this month, it had risen sharply to 2.85%. The KOLs of property industry had previously been emphasizing that HIBOR-based mortgage (HIBOR plus 1.3%) was lower than the rental yield of 3.5%, making purchasing properties more profitable than renting flats. However, the recent sharp rise in HIBOR has gradually reversed the situation where mortgage installment is less expensive than renting.

The sharp rise in mortgage rates has immediately led to a drop in transaction prices. In recent days, second-hand property prices in many housing estates have obviously fallen. Coupled with the latest slump in the retail and catering industries, the unemployment rate has been accelerating to 3.7%. With both mortgage interest and unemployment rising, a new wave of falling property prices has started.

In a recent media interview, Chiu Kwok Hung, executive director of Cheung Kong Holdings stated that Hong Kong property prices have been falling for three years and have shown little upward momentum. Unless there are developers going bankrupt, prices will not fall significantly. So far there is no bank taking further action against these developers, the likelihood of collapsing of these developers is a slim chance.

Chiu Kwok-hung did not predict what the banks will do in the future. He described what was going on in latest property market. What if the banks do not find positive change of property market in one to two years? If so, they will inevitably take actions against these developers and even apply to liquidate those of debt-ridden developers. Until now, there are eight developers or more in Hong Kong, which owe debts ranging from five billion to over eighty billion. Chiu said that the property prices will be unlikely to rise further in coming years. If it is true, it means that it is hard for developers to reduce their debts by increasing revenue through property sales. Therefore, developers going bankrupt are foreseeable. Even In the most optimistic scenario, there are still two or three developers which would be liquidated. China Evergrande Group (3333) will be officially delisted from the Hong Kong Stock Exchange on August 25, proving that there are no companies too big to fail.

Chiu's comments were fair. Banks have not yet taken further action against developers. But they had begun to foreclose those defaulted borrowers' properties. Recently, Bank of East Asia bank foreclosed the house at 15 Gough Hill Road in The Peak, which previously was owned by Shenzhen tycoon Chen Hong Tian, and sold it in the state of bank-owned property. Two years later, the indebted developers will face their judgment date.