Hong Kong’s Resilient Housing Market

After more than a decade of rising home prices, a debate is now underway on whether the bull has run its course given the lingering USA–China trade war and rising interest rates. While it was inevitable that ongoing trade conflicts would take a toll on buyer confidence, this is an opportunity for the once overheated market to enter a phase of positive price correction and adjust itself to a new normal. At the end of the day, occupiers, not speculators, will remain the driving force of the housing demand in Hong Kong. As property prices continue to correct and return to a healthy track, buyers who were previously sitting on the sidelines will be lured back to the market, ensuring that Hong Kong’s real estate market remains a promising investment in the long run.

Luxury Property Market
In the broader market, Hong Kong home prices fell by a modest 3.6% in August 2018 from July that year as illustrated by figures from the Rating and Valuation Department. However, homes larger than 160 m2 of saleable floor area, or those considered a luxury by Hong Kong standards, dipped a smaller 3% over the same period. That is a sign that the luxury property market proves to be more resilient to the mass market.

Rental Market
Though prices were under downward pressure, rents remained on the rise. This suggests that potential buyers prefer sitting on the sidelines for the moment, turning to rentals until affordability improves amid a slowing market.

Private Housing Demand to Outgrow Supply
Over the years, Hong Kong’s population has continued andwill continue to grow, according to government statistics and forecasts. Population growth has been largely stable, at an average rate of about 0.72%. The number of households has grown at an average rate of 1.46% per year since 2015. Against this scenario, housing supply failed to catch up with potential demand. New residential completions were insufficient to support housing demand generated by household growth. In 2017, around 44,400 new households were formed, while only 31,452 of new public and private housing units were completed during the same year. This demand–supply gap has widened in the past few years. It is the reason why property prices have been on the increase.

(Source: Census and Statistics Department, Hong Kong Special Administrative Region, 2017)

Residential Real Estate Market
If history is any guide, residential property prices tend to go up over a longer time horizon despite periodic fluctuations. In Hong Kong’s real estate history, there are two housing slumps on record, respectively triggered by the Asian financial crisis in 1997 and the global financial crisis in 2008. Immediately after the Asian financial crisis in 1997, banks aggressively asked underwater property owners for cash to compensate for the difference between the loan value and their home’s fair market value. High loan-to-value (LTV) mortgage borrowers who were unable to pay what the banks had asked for risked seeing their properties repossessed. The downturn persisted into the early 2000s but got back on track. Whereas the market correction after the 2008 global financial crisis was relatively short-lived, real estate prices were buoyed by the many rounds of quantitative easing initiated by the USA.

To cool down an overheating market before 2012, the government introduced punitive stamp duty surcharges, including the special stamp duty, double stamp duty, buyer stamp duty, and a 15% stamp duty on purchases made by second-home buyers together with stricter mortgage lending rules. However, the so-called cooling measures did not work out as intended. The property market took a breather right after the implementation but then returned to the rising trend until reaching today’s position.

In 2018, a moderate price correction was observed, however, as mortgage rates remain low historically, while most buyers are allowed access to mortgages set at a healthy LTV ratio of 60%, property owners still command a strong holding power. They are more able to withstand downward price swings than in the past two financial crises.

(Source: Lands Department, Hong Kong Special Administrative Region, 8 November 2018. Note: Timeline not in scale, for illustrative purpose only)

Opportunities for Developers
When fear emerges, developers show their greed by being more aggressive in the land market and the purchasing of old buildings earmarked for redevelopment. For example, Henderson is still actively acquiring properties in a couple of old buildings in Kowloon City and the Mid-levels from individual owners.

In the fast-developing Kai Tak, a consortium of developers (Wheelock, New World, Henderson, and Empire Holdings) recently acquired a piece of land from the government at an accommodation value of HKD 14,500 per square foot. Goldin Properties also acquired another land parcel in the area at HKD 15,500 per square foot.

A Slowly Deflating Property Bubble
Given the slowing pace of rising interest rates and trade conflicts, hiccups in the Hong Kong property market are unavoidable, and also understandable. Having said that, Hong Kong’s solid housing market fundamentals — continued population growth, low unemployment rates, and stronger links to the neighboring cities — will continue to drive the housing market in the long run, and will remain a safe bet for the value investor.

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