Hong Kong Residential: Low Supply is not equal to Short Supply

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

February 2009

The new residential supply pipeline is expected to go low this year, be this in terms of newly started construction, newly completed construction, or even left over units from past years. Thus, many expect this would help sustain the market (price). This is not an unreasonable view and when things get fewer, they usually tend to command better prices.

However, this is only one side of the coin. The other side is the 2^nd hand (secondary) residential market. Given the expectedly poorer economy, will there be fire sale? Maybe a few hundred desperately sold units would not matter much as the market could digest them relatively fast, but what will happen when there are thousands of such desperate sellers?

Irrespective of the actual outcome, your humble author wishes to share a few calculations here and see if we could find some insights [data sources are mainly the www.centanet.com website and relevant reports produced by the Ratings and Valuation Department of the Hong Kong SAR Government]:

A)      Method = We have looked at the 1979 to 2008 period and focused on 3 items; namely the newly completed units for the year [supply], the residential price index [price], and the GDP/Capita [GDP]. Simple correlations were done.

B)      From 1979 to 2008 = Correlation between supply and price is negative, i.e. fewer units higher prices and vice versa, but not overly significant as the R2 is 0.15. Interestingly, correlation between the supply and GDP factor is also negative, i.e. more supply when the economy was less developed and vice versa, yet the R2 is not significant at 0.23. Perhaps this might reflect the land supply restriction prior to 1997, government planning policy, and the graying of Hong Kong. However, correlation between the price and GDP is very strong with the R2 at 0.76. 

C)     If one only looks at 1979 to 1996 = the correlations between supply and price, and supply and GDP, remain similar and insignificant. However, the correlation is stronger between price and GDP with the R2 at 0.94 [1.00 is the max]. Put simply, market watchers did not need to care about supply too much as the ‘predictive’ power of GDP appeared sufficient. Note that a strong correlation does not automatically spell causality between the two aspects, just that a weak correlation usually suggests none.

D)     From 1997 to 2008 = while the correlation between supply and price remains insignificant, the one between supply and GDP turns strong with the R2 being at 0.81. Perhaps this reflects the government land supply control measures adopted during the period. At the same time, the correlation between price and GDP weakens.

What can we learn from the above? Here are a few points: 

1)      To take a guess at prospective home prices, monitoring the GDP / Cap factor appears more effective overall than watching for supply data.

2)      However, since 1997, even the GDP / Cap factor does not work that well, signifying the need to identify other factors or to consider several factors-aspects together.

3)      One thing is certain though; the total supply trend expressed in number of newly completed residential units has been on a downhill since the turn of the century despite increasing GDP and GDP / Capita.  

This is in a way not a surprise as the population in Hong Kong stabilizes and grays up. The need and enthusiasm for home buying could be reduced, and some buy not because they do not have a roof but for a better roof.

No wonder the real estate developers in town have to venture out of town for development opportunities and projects, not to mention the various professionals and consultants like your humble author.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

 Back to Home  /  Back to Simple to Read Stuff Section