Reflecting on Hong Kong’s Residential Market and Looking Ahead to 2020

Posted: Nov 14 2019Last Updated: Nov 14 2019

14 November 2019 - As the end of 2019 approaches, we’ve seen a dramatic rise in the levels of unrest. This has undoubtedly created more uncertainty for property owners, investors and tenants.  Let’s review the events of the year as they relate to real estate to provide some context and advice for buyers and tenants that may be helpful for any upcoming decisions. 


Extradition Bill, Protests and Uncertainty

Even prior to triggering the ensuing clashes with police, the Extradition Bill immediately created uncertainty around Hong Kong’s long term political and legal freedoms.  These impacted confidence in HK’s financial independence, the business and investment environment and, naturally, the real estate markets.  Residential sales transactions fell immediately, declining 44% in June from their peak in May(1)

It’s important to note that the decline in activity, while dramatic when compared to May (as has been most often been the “reference point”), sales volumes merely returned to norms seen in recent years.  June 2019 sales levels were only 5% lower than the last 5 year average.

Then, as violence emerged and escalated, existing concerns were compounded by the impact on local businesses and the increasing impact on Hong Kong’s businesses, employment and overall economy.  This additional layer of fear towards the impact of the civil unrests on our future has steadily led to further declines.

Source: Hong Kong Land Registry 

In terms of prices, there has been a correction (as one would expect).  However, it has not been nearly as significant as many believe (as of the latest data available at the time of writing).  Residential units smaller than 100m2 have, on average, fallen 4% since the protests began (Sept vs May 2019), while luxury units larger than 100 m2 have fallen 3% over the same period.
This decline is relatively small – much less than the 15-20% declines seen across the market during the 2008 GFC.  In addition, absolute prices remain substantially higher than they were 10 years ago.  (Note that the below graph shows price indexes, not absolute prices, hence why 100m2+ luxury prices appear to be lower than smaller units.)  
Source: Rating & Valuation Department Hong Kong


It is not to say prices will not decline further, since it’s likely they will - or already have and the data has yet to show it.  There is a lag in much of the relevant data affecting property markets.  In addition to sales prices and volumes, macro-economic data including GDP and funds flows are released several months after the fact.  It’s possible that these may differ from expectations and, when released, impact the market further if they deviate from expectations.


Hong Kong Policy Address 2019

In her third annual policy address, given on 16 Oct 2019, Chief Executive Carrie Lam made several key policy announcements aimed at making housing more accessible to the Hong Kong people, particularly first-time home buyers and lower income groups.

These policy changes included

  1. Increases in the Loan-To-Value ratio for loans on property purchases up to $10 million;
  2. An increase in supply of transitional housing;
  3. Expediting the resumption of land for new housing; and
  4. Accelerating the sale and supply of housing through various government schemes.

The policy address has incentivized more purchasers to enter the market, as seen in the uptick in sales transactions in October.  However it’s unclear if the expansionary effect on the housing market will be enough to offset the downward pressure caused by civil unrest in the medium term.


Interest Rates – Causes and Effects

It has been just over a decade since the Global Financial Crisis. Brought on by mass defaults in subprime mortgages and secondary lending markets, the 2008 recession is considered by the International Monetary Fund (IMF) as the second greatest economic crisis in history after the Great Depression of the 1930s.  The US Federal Reserve brought interest rates down to between 0% to 0.25% and averted an even more disastrous outcome.  These conditions lasted for an unprecedented 8 years, from December 2008 to December 2016 - almost as long as a full economic cycle.

If interest rates continued to remain at those levels, the Fed would lose its primary means of stimulating the economy if another crisis were to occur. As a result, it made a conscious effort to raise interest rates over the course of the next 2 years. 

Then, in July of this year the Fed lowered rates once again.  This was closely followed by another two more adjustments in September and October, bringing rates down to current levels of between 1.5 to 1.75%.  Given the HKD-USD peg, the HKMA also made adjustments, reaching its current 2% level.

Source: Trading Economics

The Fed began reducing rates to offset slowing economic growth, naturally.  The slowdown has been driven by many factors – the natural phase of the economic cycle (after a 10-year boom), the US-China trade war, concerns in Europe and, if one were cynical, political reasons.  At the time of this writing, these situations appear somewhat stable, or at least have been fully priced in by the markets and the Fed.  It’s safe to say that, if global conditions do worsen, the Fed is likely to use interest rates to further stimulate the global economy, which in turn may prevent a dramatic fall. 


What Does This Mean If You’re Watching the Property Market?

It’s impossible to predict how the trade war, Brexit or the Hong Kong protests will further evolve (or devolve).  However, the roller coaster of world and local events has created much more uncertainty about the future or, in financial terms, volatility.  Market news can contribute to this uncertainty, particularly when single events – a failed sale, or a deeply discounted transaction - are cited as proof that the entire market is falling precipitously.  Focus on thoughtful analyses that consider both the most recent events and the context of a longer-term perspective.

In our opinion, it’s likely the market will weaken further as protests continue or a recession becomes more evident.  However, the wave of buyers that have rushed into the market during dips strongly suggests that pent up demand and a fundamental interest in owning property will limit the extent of the decline.  Residential prices have historically been more resilient than retail or commercial properties, and this is likely to continue to be the case. 


If you’re a prospective purchaser or an owner, remain calm amidst the volatility and follow the example of the investment legends.  When markets are jittery, they see opportunity by looking farther ahead than others do.  Warren Buffett changed his strategy early on, from seeking “cigar butt” investments at heavily discounted prices to investing in great assets at a “good” price, knowing they’d make him money in the long term.  Being well informed will enable you move quickly when an opportunity arises.  This applies to not only to buyers but also to sellers and landlords.  Taking a good offer when you have one may save you being stuck with an empty asset for an unknown period of time. 

In other words, follow the data and ignore speculative noise.


Buying for Self-Use: 

If you’re looking for a property to live in as a long term investment, don’t lose sight of that.  Finding a property that you will be happy living in should come first, and when you do, don’t try to time the bottom.  There may be further market downside on the horizon but many people have been disappointed when they’ve missed out on a great home because they hoped it might fall by few percentage points in price.  “The Market” is merely an average, an indicator.  Not every property’s price will match the market, and another buyer may buy your perfect property before you do. 

Buying for Investment

However, if you’re a pure financial investor building a portfolio, then there are already good investments in the market.  The same advice about averages applies – there are motivated sellers already willing to execute a quick sale at a below-average price.  But unless you’re in the ultra-luxury market (with only a few potential buyers), that price is unlikely to be much less than other recent comparables.  Be realistic about the data so you don’t miss out on assets that get snapped up by other investors.

Renting a Home:

Finally, for tenants, I strongly encourage that you listen to agents and save yourself a lot of angst.  This is not a plug for the team (though I’m admittedly somewhat biased), but for recognizing the facts of the market.  Many people are scouring the market right now, frustrated that they’re not finding bargain properties – 20% more space for 80% the “original” price. Landlords are not rushing to rent out their properties at 20-30% discounts for a simple reason – they don’t have to. 

As per the Rating and Valuation Department, vacancy rates remain extremely low as evidenced by yields (2.3% at the market midpoint, and 2.1-2.2% for properties larger than 100 m2).  Yields have not changed during the protests the competition for rental properties hasn’t declined.  If anything, there is actually more competition for rental units in the mid-to-luxury market because prospective purchasers have been holding off from buying.  This is why rental levels have remained within 1% of pre-protest levels and have actually increased in most segments(2).

People are spending enormous amounts of time viewing 20, 30 or even more properties before realizing that rental prices haven’t plummeted the way they believed.  Save yourself that frustration and look for a great property you can be happy in at a market price, even if that means adjusting your requirements (price, size or location).  You’ll save yourself a lot of time and stress. 



(1) Hong Kong Land Registry

(2) Rating and Valuation Department

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