After a 10% Market Decline in Late 2015 to Early 2016, Hong Kong Home Prices Resume Their Relentless Upward Trend in late 2016

After a 10.12% market correction from its peak of 350.31 in the 3rd Quarter of 2015, Hong Kong home prices bottomed out in the first half of 2016 to 314.84 (2016 Q1) and 315.30 (2016 Q2).  In the third quarter of 2016, they resumed their relentless upward trend, jumping 6.91% in just one quarter to reach 337.09% but still below the peak of 350.31 posted in the 3rd Quarter of 2015.

How low can Hong Kong Property Prices Go? Some Clues from the Not Too Distant Past

How low can Hong Kong Property Prices Go? Some Clues from the Not Too Distant Past.

Last January 8, 2016, in a post titled "Singapore, Malaysia, and Thailand Post Flat to Declining Housing Prices, Can the Philippines and Indonesia be Not Far Behind? - 2nd Qtr 2015", we showed the remarkable run-up in housing prices in Asia, often outpacing inflation by a wide margin.  One of the countries featured was Hong Kong, whose real estate prices have jumped by 234.46% in a little over ten years, outpacing inflation by a staggering 207.16% as of the second quarter of 2015.

Little did we know that property prices peaked a quarter later, in the third quarter of 2015.  Since then, Hong Kong property prices have entered a correction phase, dropping by 10.12% in the two quarters since then.

When we go back to charts with historical data dating back to 1980, we find that such corrections can sometimes presage a bear market in properties. The last major bear market started in October 1997, several months after Hong Kong was handed over back to China from the U.K., lasting an arduously long 69 months or almost six years.  During this phase, prices dropped a gut-wrenching 66.22% in all classes, dipping below their inflation-adjusted levels for two quarters in 2003.  The bear market took place during the financial contagion that occurred during the Asian Financial Crisis.

Unsurprisingly, the last correction took place amid the Global Financial Crisis of 2008.  The correction was short, lasting a mere seven months, from June 2008 to December 2008. Property prices for all classes dropped 17.22% - or almost a bear market (20% decline).

Hong Kong Property Price Indices are broken down by property class.  Property classes are defined by the property's area.

• Property Class "A": Area below 40 sq. m.
• Property Class "B": Area between 40 sq. m. and 69.9 sq. m.
• Property Class "C": Area between 70 sq. m. and 99.99 sq. m.
• Property Class "D": Area between 100 sq. m. and 159.9 sq. m.
• Property Class "E": Area above 160 sq. m.

Here's an annual chart of the various Hong Kong Property Price Indices by property class:

Here's the same chart on a monthly basis:

As evidenced by the chart below, the largest price run-up and decline in the last decade have taken place in the smaller property classes - the A,B, and C Property Classes.  Class A properties have risen the most, rising by a staggering 225.19%.  In the three bull markets prior to that, it was the largest property class, Class E - with areas above 160 sq. m., that have risen the most.  The smaller property classes lagged behind,

A similar dynamic has taken place in the recent market decline.  It was the Class A properties that declined the most, followed by the bigger property classes. With the exception of the period from October 1997 to July 2003, the smaller property classes were more stable.

This is born out by the historical price volatility of each property class, as demonstrated by the chart below: 

The recent large price swings for the smaller property classes have been outside recent historical norms.  

As seen in the chart above, there were quite a few times when the annual change in the property price indices was more than two standard deviations beyond the mean, the most recent being in 2010 when the A Class posted an annual gain of 26.77%. Under a normal probability distribution, this does not happen 95% of the time.

These smaller properties are generally held by small retail investors who tend to purchase properties for their own use.  As a result, volatility is usually lower among the smaller property classes. The large run-up and decline in these smaller property classes in recent times indicates that the buying was driven by rampant speculation rather than real consumption.  And that always ends badly.

So, how low can Hong Kong property price indices go? Your guess is as good as ours.  But given the spectacular price increases from December 2008 to September 2015, it wouldn't be beyond us to think that the prices could revert back to their inflation adjusted levels as they did in the aftermath of the Asian Financial Crisis (October 1997 to September 2003), declining by more than 60% across all property classes.

8990 Holdings, Inc.: The Case of the Disappearing Past Due Installment Contract Receivables

In a previous blog post titled "Has the Philippine Real Estate Bubble Already Burst?", we wrote on a little known factoid buried deep within the bowels of the financial statements of 8990 Holdings, Inc. (otherwise known through its stock ticker "HOUSE"), that HOUSE's level of Installment Contract Receivables (ICRs) that are over 90 days past due jumped 500% in the nine months from December 31, 2012 to September 30, 2013.

8990 Holdings Inc.
Installment Contract Receivables, Past Due but Not Impaired
In Php
	Audited	Unaudited
	December 31, 2012	September 30, 2013	% Change
Less than 30 days	76,438,532	102,996,723	34.74%
31 - 60 days	31,128,884	30,426,033	-2.26%
61 -90 days	26,930,290	10,163,708	-62.26%
Over 90 days	39,365,086	236,008,574	499.54%
Total	173,862,792	379,595,038	118.33%

These figures were taken from HOUSE's interim financial statements as of September 30, 2013 which contained audited figures for December 31, 2012 and interim figures for the nine months since then.  The document can be found here and also on the website of the Philippine Stock Exchange.  The Annual Report can be found here and here.

Today, those figures are very much gone or reduced.  The level of past due ICRs were reduced by almost 80% for the very same figures that were audited as of December 31, 2012.  

8990 Holdings Inc.
Installment Contract Receivables, Past Due but Not Impaired
In Php
	Interim Report	Annual Report
	Audited	Audited
	December 31, 2012	December 31, 2012	Variance	% Variance
Less than 30 days	76,438,532	18,426,966	-58,011,566	-75.89%
31 - 60 days	31,128,884	5,049,846	-26,079,038	-83.78%
61 -90 days	26,930,290	5,910,360	-21,019,930	-78.05%
Over 90 days	39,365,086	6,357,158	-33,007,928	-83.85%
Total	173,862,792	35,744,330	-138,118,462	-79.44%

Despite an almost 40% jump in sales, the level of past due ICRs were even lower at year end 2013 than they were at year end 2012.

8990 Holdings Inc.
Installment Contract Receivables, Past Due but Not Impaired
In Php
	Interim Report		Annual Report
	Audited	Unaudited	Audited	Audited
	December 31, 2012	September 30, 2013	December 31, 2012	December 31, 2013
Less than 30 days	76,438,532	102,996,723	18,426,966	3,824,739
31 - 60 days	31,128,884	30,426,033	5,049,846	2,403,551
61 -90 days	26,930,290	10,163,708	5,910,360	2,177,276
Over 90 days	39,365,086	236,008,574	6,357,158	15,993,266
Total	173,862,792	379,595,038	35,744,330	24,398,832

HOUSE dependence on ICRs to fuel sales has only increased since December 31, 2012.

8990 Holdings Inc.
Installment Contract Receivables/Sales
In Php
	Audited	Unaudited	Audited	Audited
	December 31, 2012	September 30, 2013	December 31, 2012	December 31, 2013
Installment Contract Receivables	4,672,109,197	8,165,199,990	4,672,109,197	9,777,920,990
Sales	2,888,596,423	4,367,429,533	3,830,644,048	5,356,098,815
Days Sales	437	505	329	493

So has the risk to its stockholders. 8990 Holdings Inc.
Installment Contract Receivables/Stockholders Equity
In Php
	Audited	Unaudited	Audited	Audited
	December 31, 2012	September 30, 2013	December 31, 2012	December 31, 2013
Installment Contract Receivables	4,672,109,197	8,165,199,990	4,672,109,197	9,777,920,990
Stockholders Equity	3,948,015,021	6,049,131,256	3,948,015,021	6,595,847,184
Installment Contract Receivables/Stockholders Equity	118.34%	134.98%	118.34%	148.24%

8990 Holdings Inc.
Real Estate/Stockholders Equity
In Php
	Audited	Unaudited	Audited	Audited
	December 31, 2012	September 30, 2013	December 31, 2012	December 31, 2013
Real Estate Inventories	2,040,532,596	2,081,143,259	2,040,532,596	2,243,559,834
Land held for Future Development	1,010,474,241	3,605,811,050	1,010,474,241	3,784,727,576
Investment Properties	142,365,067	140,860,631	142,365,067	141,928,584
Total Real Estate	3,193,371,904	5,827,814,940	3,193,371,904	6,170,215,994
Stockholders Equity	3,948,015,021	6,049,131,256	3,948,015,021	6,595,847,184
Real Estate/Stockholders Equity	80.89%	96.34%	80.89%	93.55%

8990 Holdings Inc.
ICRs & Real Estate/Stockholders Equity
In Php
	Audited	Unaudited	Audited	Audited
	December 31, 2012	September 30, 2013	December 31, 2012	December 31, 2013
Installment Contract Receivables	4,672,109,197	8,165,199,990	4,672,109,197	9,777,920,990
Real Estate	3,193,371,904	5,827,814,940	3,193,371,904	6,170,215,994
Total	7,865,481,101	13,993,014,930	7,865,481,101	15,948,136,984
10% Losss	786,548,110	1,399,301,493	786,548,110	1,594,813,698
Stockholder's Equity*	3,948,015,021	6,049,131,256	3,948,015,021	6,595,847,184
Impact of 10% Loss	19.92%	23.13%	19.92%	24.18%

* Excludes Proceeds from Follow-on Offering

Impairment Losses

Based on its Annual Report, the company has now made provisions for impairment losses of Php 2,795,106 as of December 31, 2013, whereas they recognized none in the years before.  This is a step in the right direction.

Meanwhile, what happened to all those past due ICRs?

Is There a Real Estate Bubble in the Philippines?

Editor's Note:  This update reflects the true Real Estate & Construction Loans to GDP ratio published last June 25, 2012.  The previous figures were published in error.

Is there a real estate bubble in the Philippines?  Several people, including Finance Secretary Cesar Purisima and high profile businessman Andrew Masigan have asked this question earlier this year.  Both have come to the conclusion that there is no real estate bubble - yet.

But does the data bear this out?  Based on the data available from the banking system, if we are in a real estate bubble, we are only in the beginnings of one. Given the growth in our country's GDP since 1999, Real Estate Loans, on an absolute basis, have picked up noticeably since 2008, but construction loans have not.

On a relative basis, Real Estate and Construction Loans as a percentage of GDP have dropped considerably since 1999, from a high of 7.56% of GDP in June 1999 to a low of 4.43% of GDP as of March 2007.  Today, that ratio has gone up considerably, and now stands at 6.46% as of September 2011.  So Real Estate and Construction Loans relative to GDP have bottomed out but not have approached near peak levels of 7.56% of GDP.  It is important to note that the availability of banking data available on www.bsp.gov.ph goes back only to March 1999.  There previous peak levels could have been much higher.

Philippine Banking System
Real Estate & Construction Loans vs. GDP
March 1999 to September 2011
In Peso Billions
Quarter/Year	Real Estate Loans	Construction Loans	Real Estate & Construction Loans	GDP (Current)
March 1999	198	57	255	3,244
June 1999	222	56	278	3,244
September 1999	221	55	275	3,244
December 1999	190	54	243	3,244
March 2000	213	51	264	3,581
June 2000	220	49	269	3,581
September 2000	180	89	269	3,581
December 2000	224	47	271	3,581
March 2001	203	51	255	3,889
June 2001	205	43	248	3,889
September 2001	204	44	249	3,889
December 2001	204	42	246	3,889
March 2002	212	43	255	4,198
June 2002	207	40	247	4,198
September 2002	203	40	242	4,198
December 2002	204	36	239	4,198
March 2003	250	47	297	4,548
June 2003	250	46	296	4,548
September 2003	261	48	309	4,548
December 2003	262	47	310	4,548
March 2004	260	53	312	5,120
June 2004	257	37	294	5,120
September 2004	255	36	291	5,120
December 2004	262	36	297	5,120
March 2005	252	41	293	5,678
June 2005	253	35	289	5,678
September 2005	268	35	304	5,678
December 2005	258	34	293	5,678
March 2006	273	33	306	6,271
June 2006	288	33	321	6,271
September 2006	284	33	318	6,271
December 2006	291	34	325	6,271
March 2007	272	34	305	6,893
June 2007	287	37	324	6,893
September 2007	285	37	321	6,893
December 2007	290	36	326	6,893
March 2008	290	30	320	7,721
June 2008	339	34	373	7,721
September 2008	358	37	396	7,721
December 2008	400	41	441	7,721
March 2009	393	32	426	8,026
June 2009	418	31	449	8,026
September 2009	420	32	452	8,026
December 2009	448	33	481	8,026
March 2010	455	34	488	9,003
June 2010	465	35	500	9,003
September 2010	466	35	502	9,003
December 2010	497	36	534	9,003
March 2011	521	37	558	9,361
June 2011	542	40	581	9,361
September 2011	564	41	605	9,361
Source: www.bsp.gov.ph and www.nscbgov.ph