Spare a thought for Hong Kong’s cursed real estate market
. Ever since 2018, it has faced a series of seemingly never-ending domestic and external shocks. Every time a recovery appears to be taking hold, another crisis erupts, casting doubt over whether a durable upturn will ever materialise.
The residential market has fared better than its commercial counterpart, mainly because of persistent undersupply, the low rate of home ownership and, until recently
, rock-bottom interest rates.
Yet, since the beginning of last year, the strains on the housing market have intensified. Since its peak in August 2021, the Centa-City Leading Index, a gauge of secondary home prices
, has plunged more than 20 per cent to its lowest level since April 2017.
Even the dramatic reopening of mainland China’s economy in December 2022
– which was seen as the key catalyst for a restoration of confidence in Hong Kong – failed to bring about a sustained improvement in sentiment. Weaker-than-expected growth and sharp declines in asset prices in China this year, mainly because of the meltdown in the country’s housing market
, have contributed to the Hang Seng Index’s staggering decline since January 27.
As if this was not damaging enough, Hong Kong has had to contend with an ultra-hawkish US Federal Reserve. By importing monetary policy through its currency peg to the US dollar, the city has been caught between the most aggressive Fed tightening cycle since the 1980s and a deep downturn in China that has evoked comparisons with Japan’s “lost decade”
in the 1990s.
Hong Kong’s property market “has been under constant pressure”, said Angela Wong, deputy chair of Midland Holdings.
Yet what has really hit the city hard is global bond markets’ belated recognition that borrowing costs will stay higher for longer
. Having anticipated a US recession this year and priced in cuts in interest rates, markets abruptly reversed course in early May as the Fed kept tightening policy, causing the benchmark 10-year US Treasury yield to soar from 3.3 per cent to as high as 5 per cent last week.
For Hong Kong, the effect was almost instantaneous. The one-month Hong Kong interbank offering rate – the main reference rate for mortgage loans
– shot up as liquidity tightened, rising from 2.8 per cent in mid-April to 5.4 per cent by early August, its highest level since 2007.
The effective mortgage rate
for new loans has risen to 4.1 per cent, well above the 2.7 per cent residential rental yield. This dramatic repricing has paralysed the property sales market. “This was the straw that broke the camel’s back,” said Praveen Choudhary, an equity analyst at Morgan Stanley.
Last quarter, transactions in the secondary market were 51 per cent lower than in the third quarter of 2021, before the Fed began raising rates. The affordability ratio, or mortgage payments as a proportion of household income, has risen to 61 per cent, according to data from Midland Holdings. That is up from a range of 40 to 50 per cent in the past 15 years.
Morgan Stanley expects prices to fall 3 per cent this year and a further 5 to 10 per cent in 2024. Goldman Sachs is less pessimistic but, tellingly, does not expect them to rise again until 2026. In a report published on October 3, Societe Generale said Hong Kong’s property market was “at the eye of the storm” and warned higher interest payments could start to weigh on the post-pandemic recovery in private consumption
Not so fast. While the outlook for the residential market has deteriorated sharply, it is not all doom and gloom. First, the fall in prices must be put into perspective. The nearly 20 per cent decline brings home values back to their level in 2017, when the International Monetary Fund (IMF) was concerned about Hong Kong’s “booming and overvalued” property market
In a report published in May, the IMF noted that prices were still overvalued by 13 per cent at the end of last year, when they were just a tad higher than they are today. To make a meaningful impact on affordability in this property market
, the adjustment in prices needs to be much steeper.
Second, risks to financial stability are manageable. Two-thirds of homeowners are mortgage-free. Among those with mortgages, average loan-to-value and debt-service-to-income ratios for new mortgages were a prudent 56 and 37 per cent respectively last year, underpinned by tough stress-testing requirements. JPMorgan noted in a report published last November that mortgage holders were not median households and instead were likely to be in the top 20 percentile of income distribution.
Third, the downturn has a silver lining. It convinced Chief Executive John Lee Ka-chiu’s administration to announce in its policy address last week that it would halve stamp duties
for foreigners, as well as for Hong Kong residents purchasing a second or additional property. Sellers who have held properties for two years will also be able to offload them without paying a special stamp duty.
While the measures will not move the needle given the sharpness of the rise in borrowing costs, Choudhary said they differentiate Hong Kong from Singapore, which has raised property levies aggressively, particularly on foreigners
Moreover, the government is showing greater resolve in tackling the fundamental problem in the city’s housing market: chronic undersupply
. The projected supply of public housing units is set to increase significantly, shortening the waiting time for applicants, while more private housing is forecast to be delivered. Although governance and administrative failings throughout the development cycle need to be addressed, it is a step in the right direction.
Intense pressure on Hong Kong’s housing market is unlikely to abate any time soon. Even so, strong macroprudential regulation and a resilient banking system make a full-blown crisis highly unlikely.
Of far greater concern is whether the underlying issue – the structural imbalance between supply and demand – can ever be resolved.
Nicholas Spiro is a partner at Lauressa Advisory