Asia’s winning cities: outlook for 2019
Cooling house prices after a clampdown by authorities on runaway buying will create a rare window for investors in residential real estate to find value in some of Asia’s leading cities next year.
Demographic trends such as population growth and rural migration have driven demand for residential property in the region’s most prosperous urban centres over the past decade.
High quality living standards have attracted skilled and unskilled labour both domestically and internationally to globally connected cities.
High quality living standards have attracted skilled and unskilled labour both domestically and internationally to globally connected cities such as Hong Kong, Singapore, Tokyo and Sydney. We collectively refer to these as “Asia’s winning cities”.
House prices in these markets have surged 25% on average over the past five years to Q2 2018 , having soared more than 200% in Hong Kong and 90% in Sydney since 2008.
Low interest rates have acted as a catalyst, along with rising affluence as wealthy Asians – particularly mainland Chinese – have sought to capitalise on their newfound prosperity.
Governments and regulators have responded by imposing measures to stem rising prices, fearful that high levels of household debt pose a systemic economic risk in the event that rate hikes spark loan defaults and undermine consumer spending. They are mindful, too, of exacerbating societal divisions as homes have become unaffordable for even median income households.
To restrict demand and dampen prices, authorities have tightened rules for developers, companies and individuals, including raising transaction taxes for non-residents and the buyers of second homes.
This July the government in Singapore raised stamp duty on property purchases and lowered loan-to-valuation (LTV) levels, thereby increasing the amount required for deposits. This is in addition to an escalation in stamp duty rates on both buying and selling properties.
Similarly, the Hong Kong government has announced a series of cooling measures this year, including a vacancy tax on new homes left empty for six of the preceding 12 months and a requirement for developers to offload at least 20% of their units during pre-sales. Both are designed to limit commercial profiteering and expose house builders to market forces.
In September, the city’s commercial banks also raised mortgage lending rates for the first time in more than a decade after the Hong Kong Monetary Authority hiked interest rates. With the Hong Kong dollar pegged to the greenback, more rate hikes are forecast if the US Federal Reserve continues to normalise its monetary policy.
Fears of a housing bubble have led the Australian Prudential Regulation Authority to tighten lending standards for banks in recent years, capping investor loans and limiting interest-only lending. Outright declines in house prices have been recorded nationwide since late last year.
Only Japan among the region’s most developed urban centres has not attempted to regulate housing demand, with prices having only risen a fairly modest 15% since 20081. But this is a unique market in which the government promotes housing densification – turning low-rise homes into high-density towers – to increase the supply of housing units.
Regulatory restrictions have started to take effect, and together with forecast rate hikes they point to more subdued property prices next year. We think this will present opportunities for investors to capitalise on a slowdown in prices in Asia’s winning cities.
We don’t anticipate a prolonged slowdown in housing demand, nor do we see modest price declines as a harbinger of a more serious downturn. Cramped living conditions and overcrowding remain a reality in these cities, with demand for housing having built up over years. High prices have compelled many grown-up children to continue living with their parents, while population growth will only add to housing pressures.
Property prices in Hong Kong started to decline in the fourth quarter this year, and also look set to tread water in Singapore in 2019. Dips in valuation could arise quickly in these fast-moving markets and present potential entry points.
In Australia, an increasing shortage of capital for developers is creating opportunities to finance the development of well-located but affordable mid-market accommodation.
As for Japan, low yields make investment in core property unattractive. We see value in developing or refurbishing quality homes in leading cities to meet demand from rising foreign and domestic migration.
As such we anticipate continued housing demand in Asia’s winning cities over the medium term. Investors might want to seize on this window while they have the chance.
1 Source: Japan’s Ministry of Land, Infrastructure and Transport, Hong Kong Rating and Valuation Department, Singapore’s Urban Development Authority. Australian Bureau of Statistics