5 July 2019 - I remember the initial skirmishes of the US-China trade disputes well. A seemingly innocuous and isolated tariff on solar panels was the first move made by US President Donald Trump in January 2018. This was then followed by a series of tariffs and threats of further tariffs on goods ranging from steel to batteries to TVs – covering over a thousand categories of Chinese imports.
Unsurprisingly, China responded in-kind and the dominoes began to teeter, but after an initial wave of concern, the US market did not seem overly concerned. After some volatility during the first few months of 2018, US stock markets brushed off their concerns and restarted their longstanding ascent, with the S&P 500 rising over 10% between April and mid-September that year to reach historical highs.
Hong Kong’s stock market has been more sensitive to the unfolding uncertainty, as one would expect given our close ties to the Chinese economy. On top of trade war fears, Brexit concerns led the Hang Seng Index to begin a steep decline in June 2018.
What about property prices?
Real estate markets typically lag financial markets, which makes sense. Liquid, publicly traded securities can immediately reflect changes in sentiment while property investments represent significant, long-term decisions being made by buyers that are often risking significant portions of their capital. Thus it was not until August that we began to see Hong Kong property prices fall, with rents following in November.
However, the real indicator of property market activity is trading volume i.e. the number of purchases occurring in the market. HK property sales volumes peaked in May and declined each month for the remainder of 2018, with December purchases (also a seasonally quiet month) down 65% from May levels. Volumes are a leading indicator of prices, since sellers only adjust prices when buyers become more scarce.
This is the most telling indicator of the effect of the trade war on Hong Kong’s real estate market. HK’s property market is driven by sentiment, perhaps more so than many global markets given our economy’s dependence on the financial markets and a cultural history of highly active real estate investments.
The trade war has affected more than just sentiment. In September 2018 OKAY.com was preparing to open a third office in Causeway Bay when we received a call from our PC supplier, warning us of a 6-8 week delay in delivering our computers and monitors. The reason? A chip shortage due to the trade war. (Fortunately, we found a solution and had our computers in time for the opening.)
The point is that the impact on Hong Kong’s economy is more direct than many first realized, as evidenced by the ~6-month lag between the start of the trade war and the market downturn. What initially seemed far off – a power-play between two giants that might not have a major, direct impact on other economies – has very real implications for Hong Kong.
How worried should HK property investors be?
The real estate markets have recovered in 2019, in terms of both prices and volumes, and confidence has been returning. Both China and the US want stability in the long term, even though it may take some dramatic posturing and sparring to get there.
Hong Kong also benefits from a natural hedge in the US dollar peg. Currency markets enormously complex systems, though many experts believe a prolonged trade war would likely devalue the US dollar. This, in turn, would help Hong Kong’s trade economy and its real estate markets.
We’ve already seen how quickly market sentiment rebounds each time US-China talks show “progress” and trade war concerns ease. So we can reasonably expect that, assuming a full-blown trade war is eventually averted, confidence will return and people will refocus on real estate as a good long term investment.
Ultimately Hong Kong’s long term prospects remain healthy, as mentioned in past articles. China’s economy is shifting from being export-driven to consumer-driven, reducing its dependence on the US. Overall demand growth in Hong Kong (GDP as one indicator) still outpaces supply growth, and HK continues to be a financial hub for the region. One should still watch the trade war closely though hopefully both sides will feel increasing pressure domestically and avoid further escalation. Stay tuned.