HONG KONG: Investors waiting for Hong Kong home prices to fall to levels last seen during the 2003 SARS epidemic may be disappointed as the limited supply actually bolsters values.

Home values have fallen as much as 25 percent from last year's peak, as the city slid into a recession in the third quarter on declining exports and domestic demand. But prices are still about 40 percent higher than during SARS, mainly because the government has postponed scheduled land sales, analysts said yesterday.

"Government policy was a driving force in the steep drop in prices between 1997 and 2003," said Buggle Lau, chief analyst at Midland Holdings, Hong Kong's biggest publicly traded property agency. "Now, external factors are more severe, but internally, the situation is better as the government has continued to freeze supply.

Home values have tracked the economy, peaking in the second quarter of 1997, then crashing in the ongoing financial crisis. The 2000 dot-com bubble burst, the Sept 11, 2001, terrorist attacks and the 2003 SARS outbreak all caused prices to fall as much as 70 percent.

To support prices, the government, one of Hong Kong's largest suppliers of unoccupied land, suspended its scheduled land sales in November 2002. It resumed sales in January 2004, using a system where developers trigger auctions from a list of sites by promising to pay a minimum amount. The system will stay, Chief Executive Donald Tsang said in October.

Completion of private homes in the next two to three years will be 10,000-15,000 annually, below the 10-year average of about 23,000 units, according to Marcos Chan, head of research for the Pearl River Delta at Jones Lang Lasalle.

Home prices may bottom out in the second half of 2010, judging from the length of the 1997-2003 decline, Chan said yesterday.

An index of 73 apartment buildings developed by the Centaline Property Agency doubled to a level of 72.8 in the first quarter of 2008 from the 2003 record low on a booming economy and stock market, before dropping to 55 at the end of last year.

Bloomberg

(HK Edition 02/10/2009 page16)