12 March 2020 - Amidst the black-swan emergence of the coronavirus, rather than simply state my own views about the potential impact on property prices, I want to also summarize what various real estate experts across different parts of the industry are saying. Here’s a range of recent comments from real estate professionals, followed by my own views, for you to consider before making an important property decision - whether that’s to buy, sell or remain on the sidelines for the moment.
The majority the real estate industry are predicting that even with the threat of a coronavirus pandemic looming, Hong Kong home prices aren’t expected to dramatically fall to levels akin to those seen when SARS hit the Territory in 2003.
Phillip Zhong, senior equity analyst for Hong Kong and China real estate at Morningstar Investment Management says “SARS and the coronavirus outbreak have occurred at completely different points of the housing cycle.” He notes “In the 2000s, the market was already fairly depressed coming off the Asian financial crisis, so SARS extended the decline by one year or so. When SARS came along, the bulk of the fall in prices had already occurred.”
Most others agree there will be negative consequences but that the current outbreak won’t sink home prices down to SARS levels. “It may bring a 10-20% drop if the epidemic isn’t over by June this year,” notes Charles Chan, MD at Savills Valuation and Professional Services.
JLL’s Nelson Wong stated that “The typical seasonal sales recovery following Lunar New Year in Hong Kong will likely be pushed back because developers will choose to avoid launching new projects during this period. This will mean that primary sales will likely remain at low levels while the secondary market will slow down as well with prospective buyers taking a wait-and-see approach to events.”
Derek Chan, head of research at Ricacorp Properties, was of the opinion that housing prices will probably see a drop of 3-5% in the first quarter of 2020. The extent and duration of the fall will depend on how the epidemic develops.
Meanwhile, Thomas Lam, executive director at Knight Frank believes the number of homes changing hands may fall by 25-35% over the next few months while prices will decline between 5-10% this year.
Why are most experts only predicting relatively modest price declines?
Hong Kong has weathered three major property crashes in the last 25 years. The Asian Economic Crisis in 1997 saw property prices fall by almost 50% in a single year. Then, the dot-com crash (2002) began a decline that continued with the SARS outbreak in 2003, resulting in prices falling 43%. The most recent major crash was experienced as a result of the GFC of 2008, with prices falling 17%(1) before eventually recovering.
Since SARS has been heavily referenced in the media as a comparative crisis (for obvious reasons), let us put it in perspective. Overall home prices have increased about 400% since then, implying that prices would need to fall a whopping 80% to return to SARS levels.
In this light, it’s incredibly unlikely prices will fall to SARS levels. Prices are, by definition, a result of supply and demand. Supply in Hong Kong is relatively fixed, with very limited capacity to expand. The swings we’ve seen over time have been caused by changes in demand which, in turn, is driven by economic means and people’s state of mind (optimism or pessimism).
During SARS, prices fell and recovered within less than a year as the outbreak was brought under control and as people realized the chance of contracting SARS was lower than they initially believed i.e. confidence returned. Compared to SARS’ impact on market confidence, the coronavirus has a lower mortality rate (~3.4% vs ~7% for SARS), and Hong Kong has a better level of preparedness – both procedurally and emotionally.
Hence it’s incredibly unlikely that the coronavirus will lead to an 80% decline in demand (or anywhere near it). A fall in demand of that magnitude would require a mass exodus of residents from Hong Kong – something only a zombie-apocalypse could ostensibly create. And as much as I enjoy a good zombie film, it remains a thing of fiction. Furthermore, since the virus has spread globally, where would people go?
A more plausible scenario is that the virus triggers a domino effect of stifled travel and trade, lower business productivity, increased consumer caution, reduced spending, increased defaults on debt payments and, ultimately, a global recession. This is the scenario that has led to the dramatic moves in global stock markets recently.
While this is possible, it’s not a certainty. Unlike SARS, which was primarily seen as a Hong Kong epidemic, the virus’ spread has, paradoxically, made it a higher priority globally. This in turn has led to far more research and rapid progress in developing a vaccine. Also, the adoption of practical hygiene precautions should reduce the transmission rate and a ~97% recovery rate will eventually sink in, calming panic levels.
In Hong Kong, there is still significant long-term demand for property. In fact, in the first two months of the year, OKAY.com saw record levels of inquiries from buyers. There are also signs of significant acquisitions being made by investors and developers. This explains why prices haven’t fallen more significantly (contrary to buyers’ hopes).
While I do think we haven’t seen the virus’ full economic impact on Hong Kong and that there is more weakness on the horizon, as soon as a vaccine or cure is discovered, confidence (and demand) will quickly return. I can’t predict a specific percentage the market will fall before that happens, but the repeated recovery from much larger crises leads me to remain optimistic that we’re not in for global catastrophe, but a temporary period of uncertainty that is in fact creating opportunities.
(1) Rating and Valuation Department data