HONG KONG: The sustainability of the current rally in the city's housing market has been questioned in the face of the continuing weakness in the economy and forecasts of a further downturn later in the year.

Analysts say while factors such as near-zero interest rates and influx of speculative money fuelled a buying frenzy in several new housing projects, there are serious doubts if the uptrend will continue or fizzle out.

"I am not sure if the ongoing rally in the housing market will be sustained because it is diverging very much from economic fundamentals," said Hang Seng Bank senior economist Irina Fan.

"What worries market participants most is the fact that we haven't seen yet the light at the end of the tunnel. Our economy is still in recession," she added.

"All leading indicators continue to point to a further contraction of our economy," she said, as she noted declining exports and retail sales and rising unemployment.

Most analysts say that activity in the housing market often lags behind the general economy by 6 to 9 months. At the moment, the housing market has outrun the economy by a large extent.

After hitting bottom at the end of last year, sales of new flats have surged in recent weeks.

Last month, the number of residential units which changed hands totaled 11,788, the highest level since March 2008, and up from a trough of around 5,000 units.

Meanwhile, property prices have risen by 13.5 percent on average since the start of this year, nearly recouping the 15 percent drop last year.

Lingering recession

In sharp contrast to the uptrend in the housing sector, the city's economy continues to go downhill, with the GDP shrinking 4.3 percent in the first quarter of this year compared with the final quarter of last year. Meanwhile, the number of people thrown out of jobs climbed significantly to 197,000 from 112,000 early last year.

The Hong Kong purchasing manager index (PMI) stood at 44.77 in May, still way below the growth-recession threshold of 50, although a tad higher than the 44.34 in April, index compiler Markit said.

Of greater implication to the property market is a negative signal from the May PMI data, which indicated private firms continue to downsize their workforce to reduce operating costs amid dwindling businesses.

Some economists predict that the unemployment rate could climb to as high as 8 percent by the end of this year as the negative impact of the current economic downturn continues to play out.

Historical data show that rallies in the property market can not be sustained for long amid a high-unemployment environment.

The current "boom" - or perhaps just a short-term rally - in the housing market could be attributed to a general bullish market sentiment buoyed by the continuous inflow into the city of "hot money", which often refers to investments by speculative institutional investors.

"Most of the hot money should have targeted the equity market but some might have found their way into the property market despite the fact that real estates are less liquid than equities," said Daniel Chan, senior strategist at DBS Bank.

"Some hot money might enjoy the high leverage provided by the property market," he added.

Data compiled by Centaline Property Agency Ltd, a key property broker agency in the city, shows that the number of confirmor sales is increasing, indicating growing speculative activities in the property market.

Confirmor sale occurs when a purchaser (confirmor) signs a purchase agreement with the original owner but immediately resells the property to another purchaser before completion of the first transaction to reap quick profit.

Hot money burns

The near-zero bank deposit rates have also driven some money out of banks and into the property market while eased bank credits also help boost the rally to a certain extent, analysts said.

However, with liquidity being the key driver for the current rallies in asset markets, including equities and properties, analysts are far from convinced the rallies could be sustained for long.

"I cannot be too bullish about the prospects for the housing market in the coming months unless liquidity continues to pour in for some more months", Hang Seng Bank's Fan said.

DBS Bank's Chan cautions investors against a reversal in capital flows, which could trigger sharp corrections in local asset prices.

"Hot money could flow out of Hong Kong for many reasons such as diversion to laggard markets after locking in profit in the local market," he said.

They may also depart if expectations for yuan appreciation diminish or the mainland economy shows any sign of slowdown again.

The local financial system is currently flooded by as much as HK$500 billion in surplus liquidity after hot money rushed in from overseas markets in the past few months in anticipation of further yuan appreciation and an early recovery in China's economy, which will benefit asset prices in Hong Kong.

Property developers, who normally know the market much better than anyone else at least in the aspect of potential supply in the future, have flashed warning signals for the property market as they scrambled to launch new projects recently, with some new projects being offered at prices that match existing flats in the secondary market.

(HK Edition 06/05/2009 page3)