Residential prices could climb at least 5% in 2016

Showing sector outperformance backdrop.

It has been observed that Hong Kong property stocks are pricing in 20-30% decline in property prices, while it is expected that residential prices will rise 5% in 2016, providing a backdrop of sector outperformance.

According to a research note from Morgan Stanley Research, the bullish view is based on strong demographics, low unemployment rate and stable mortgage rate.

Morgan Stanley Research's proprietary residential price leading indicator shows that residential prices will bottom as early as 1Q16 and grow 5% or more in 2016.

Here's more from Morgan Stanley Research:

Our property sales to GDP ratio analysis suggests that the market is still healthy despite steep price increases since 2009. This is much more bullish than consensus expectations of property price declines of 5%-20%. Our positive view comes from continued supply and demand imbalance in the near term, favorable risk reward on the regulation side, and minimal impact from Fed rate increases as long as they are gradual.

We have deep dived into each demand force – there are sufficient "marginal/additional buyers": We expect demand to stay robust because of improved demographics and immigration. The number of adults above 25 years of age rose by 6K to 78K pa during 2010-14 (as compared to 72K during 2005-09). Also, an increase in first-time marriages (up 18% or 6K to 38 K per annum during 2010-14) is helping create demand for private residential apartments, where we expect completion of just 11K units in 2015.

Government/developers may also miss their completion target of 18K units in 2016e. In 2014, over 56K (+15% YoY) working visas were approved. Furthermore, the government relaxed its visa policy of attracting well educated professionals in April 2015. The number of non-local students is rising (15K in 2014, up 4% ). In addition, 30% of the 45K mainland Chinese immigrants each year stay in private units.