A man walks past signs displaying real estate prices at an agent's office in Hong Kong earlier this month. Hong Kong residents have more than tripled the amount of money they've invested in property in the past two years as equity markets crashed and interest rates reached historic lows, CLSA Asia-Pacific Markets said earlier this month. Bloomberg News

HONG KONG: The sharp, fast recovery in Hong Kong's property market in the first half of this year is unlikely to be sustained as an inflow of excess liquidity adds volatility to the market and banks' lending appetite could be reduced if the economic recovery is tepid, according to a report released by Standard & Poor's Ratings Services yesterday.

The report suggests the recovery in prices and transactions in the first half, especially in the high-end segment of the market, appears to be disconnected from the real economy.

"The recovery was driven by capital inflows and aggressive bank lending, but that could start to dry up if investment sentiment weakens," said Standard & Poor's credit analyst Christopher Lee.

Home prices in Hong Kong have risen 26 percent this year, according to the Centa-City Leading Index, a weekly measure of residential values developed by Centaline Property Agency Ltd and the City University of Hong Kong. The index, which uses July 1997 as a base of 100, has clawed its way back to 72.7 as of September 6, the highest since July 2008, the real estate agency said last week.

Between April and June 2009, property transactions almost doubled and were 29 percent higher than the same period a year earlier, according to statistics by Standard & Poor's.

The rise occurred at a time when unemployment and household income levels haven't improved in 12 months, which has cast a shadow on residential rentals.

"Developers will continue to face challenges," the rating firm said in the report, "hot money - the excess liquidity that flows around the world in search of quick investment opportunities - is volatile," it said.

However, limited new supply, easier access to credit, and low interest rates and a stabilizing rental market should continue to stabilize the credit profiles of real estate companies, said the firm, which gave a stable overall outlook for the city's property market.

"Developers have locked in solid sales in the past 12 months at good margins, and the limited supply of new projects should underpin healthy demand for new property launches," said Lee.

"In our view, those developers with large land banks and diversified products are better positioned to withstand market volatility", he added.

Interest rates, of course, will also play a role in the market's direction. Hong Kong's current low interest rates, which lift home buyers' affordability levels and investment demand, are likely to remain low for most of 2010, tracking those in the US because of the Hong Kong dollar's peg to the greenback.

"We believe the US Federal Reserve is likely to hold interest rates at almost zero through most of 2010 due to continued financial market volatility and a weak job market," the firm said.

A slowdown in construction schedule has also constrained supply. In the first half of 2009, the start of construction on new projects hit a 10-year low after steadily declining for the decade, with a knock-on effect on project completions.

(HK Edition 09/16/2009 page3)