Market Trends through 1997

The Hong Kong property industry, like that in many places, had been cyclical. The residential market experienced two major cycles between 1973 and 1997. In 1973, prices fell dramatically during the first oil shock. Between 1975, when the market started to turn up, and 1981, real housing price tripled. Prices then tumbled 40 per cent in real terms from 1981 to 1984 as uncertainty surrounding the Sino-British negotiations over Hong Kong and a banking crisis hurt market sentiments. The market turned again in 1985 and real prices rose, with a brief slowdown around 1990 due to the Tiananmen Square crisis and the Gulf War, tripling by 1994. In 1994, in the belief that there was excessive speculation in the market, the Hong Kong Government limited the bank’s maximum mortgage amount to 70 per cent instead of 80 per cent of the purchase price value through a compliance order issued by the Hong Kong Monetary Authority. This action, coupled with rising interest rates, cooled down the property market until 1996 [Exhibit 6].

The residential market became more active once again in 1996 and prices began to rise once more. The results of Government land auctions reflected the conditions and outlook of the property market. In 1996, 10 sites were sold in four land auctions. They were all met with favourable responses, and the prices obtained were generally above expectations. For example, a site at Hung Hom Bay Reclamation was sold for HK$4.7 billion (US$600 million), the highest price ever attained for a single site at Government auctions to that time. This was equivalent to an average accommodation value of HK$34,398 (US$4,400) per square metre. At the land auction held in August, the price obtained for a large residential site in Tai Po was 41 per cent higher than the opening bid and 33 per cent above that for an adjacent site sold in June 1995.

In the fourth quarter of 1996, the luxury flat segment was particularly active, boosted by a surge in speculative activities. A significant proportion of the new flats sold was purchased by shell companies, which intended to resell quickly at a profit. To minimise transaction and finance costs, re-sales of property were made through sales of the shell companies, which had the effect of changing effective ownership, without incurring some of the charges associated with direct property sales. The average price registered in secondary private residential sales and purchase agreements was HK$4,518 (US$575) per square foot in December 1996, a rise of 24.6 per cent from same period in 1995.¹¹ Prices for flats in major private estates rose 23.5 per cent to an average of HK$4,745 (US$608) per square foot in December 1996. In the first-hand private property market, the number of transactions reached 22,851, with a value exceeding HK$85 billion (US$11 billion) in 1996.

In view of increasing concern about the upsurge in flat prices and intensifying speculation in the residential property market and their adverse effect on genuine home buyers, the Hong Kong Government set up an inter-departmental group in December 1996 to monitor the situation closely. In January 1997, members of the Real Estate Developers Association, following persuasion by the Government, agreed to adopt a number of anti-speculative measures in their sales programmes. A large developer, for example, took the initiative of limiting the proportion of flats allotted to buyers registered under company names in its primary sale in early January 1997, mainly to dampen speculation through the use of company names in the primary market.

However, interest in the market continued unabated. Both trading activity and prices for all classes of flats and in almost all districts registered marked increases. Starting in early 1997, speculative activities had also intensified in the mass market, particularly in the popular large-scale developments. In January 1997, flat prices in selected residential developments were 18 per cent higher than in September 1996, 41 per cent above the trough in October 1995, and five per cent higher than the previous peak in April 1994. By the middle of 1997, reselling was so active that out of 3,607 transactions in the first 11 days of June 1997, more than 10 per cent, or 382 deals, involved flats being resold before the documentation for their original sale was processed.¹²

Despite the onset of financial difficulties in July 1997 in Southeast Asia, triggered by the floating of the Thai baht and heightened by subsequent attacks on the Indonesian rupiah and the Malaysian ringgit, interest in the Hong Kong’s property market continued unabated. Primary sales met with a very good response, with substantial over-subscription in many instances. Long queues to view show flats of new residential properties offered for sale were common. In some cases, large numbers of buyers had to queue up for hours just to submit application forms. Amidst intense competition in the mortgage market, banks reduced mortgage rates to only 0.25 to 0.5 percentage points above the prime rate. This was combined with the strong sales promotion and offers of more flexible payment terms by developers. By August of 1997, the number of registered sale and purchase agreements for the year had already reached the total number of transactions for all of 1996 [Exhibit 9]. The total value of these agreements was 34 per cent higher than that of all 1996 transactions.

In commercial property, the market for office space picked up strongly in the fourth quarter of 1996. Along with increased trading, prices for some Grade A office space in prime locations rose considerably. Office rentals in Central had reached as high as US$1,153 per square metre per year in mid-1997, among the highest in the world. Developers pushed forward with new developments that would bring substantial additions to Grade A office space by 1998 or 1999. Retail prices and rental rates rose as well. The secondary sales market for retail space was very active in street stores in high traffic districts. For example, in September 1997, the highest per-square-foot sale ever (HK$540,816 per square foot) (US$69,000 per square foot) was recorded in a 49 square foot street store in Mongkok, one of the busiest areas in Hong Kong, and an area with the highest population density in the world. The store, which was originally 100 square feet, was bought two months before at HK$350,000 (US$45,000) per square foot and was split into two stores, one of which was resold at the new price.

In industrial property, the sales market for conventional flatted factory space remained comparatively subdued, amidst the progressive relocation of production processes to China. The sales market for industrial office space was picking up, but not at the same pitch as other segments of the market. While rentals for conventional flatted factory space (many of Hong Kong’s factories were multi-storey buildings housing several small manufacturers) stabilised, those for modern multi-purpose industrial premises remained relatively soft.