Pandemic putting a lid on HK home market
Hong Kong home prices are falling at an accelerated pace amid the novel coronavirus pandemic in the world’s least-affordable city to live in.
The private domestic unit price index of the Rating and Valuation Department slipped 2.1 percent to 370.7 in February this year — the lowest level in a year — while the gauge dived 6.6 percent from its record high recorded in May 2019.
The volume of transactions in residential apartments hit 4,555 for a total consideration of HK$35.81 billion ($4.62 billion) in March, posting increases of 3.2 percent and 1.4 percent respectively from the previous month. The figures, however, slipped 29.1 percent and 32.2 percent respectively on a yearly basis.
Home prices on decline
Buying sentiment had just begun to pick up as 2020 kicked off, when the coronavirus pandemic sent fresh shock waves through the market beginning in February.
“Home prices are on a downward trend in the face of a technical recession in Hong Kong. The jobless rate is expected to exceed 5 percent in the face of a worsening economic outlook locally and globally,” said Alva To, Cushman & Wakefield’s Greater China vice-president and Greater China head of consulting.
“Although it’s widely believed the outbreak could be contained by the second half of this year, it’s unlikely the economy will see an immediate recovery. More shop and business closures are on the cards as the economic outlook remains muted, which does not bode well for the residential market in the mid-to-long term,” he said.
Hong Kong’s latest unemployment rate has climbed to 4.2 percent — the highest in nine years. The Hong Kong Monetary Authority warned that the labor market will continue to face more challenges, and more people are likely to lose their jobs given the sluggish economic outlook.
Hong Kong’s home prices in the past decade had been propelled by a combination of stringent government regulations on property development, low interest rates due to the city’s currency peg to the US dollar, and a severe shortage of land and housing.
Local residential property prices during the period had skyrocketed 2.43 times, while real incomes have virtually stagnated for years. The city’s residential property price index surged 5.3 percent in 2019, a sharp improvement from the previous year’s 1.9 percent growth, according to official statistics.
The stratospheric home prices have made Hong Kong the world’s most-unaffordable place to live in for the 10th year in a row, according to the 16th Annual Demographia International Housing Affordability
Survey 2020. The SAR’s home prices remain one of the most overvalued, creating a greatest risk of a real estate bubble.
The situation is different from the SARS outbreak in 2003, when the market bottomed out after a six-year downturn and policy support was in place. This time around, the market had just entered a downturn.
“Despite the US Fed’s rate cut, growing concern about job security and salaries, combined with the negative wealth effect of the stock market rout, might have dented housing demand. We expect the housing price index to come down by 15 percent this year,” said OCBC Wing Hang Bank Economist Carie Li.
The HKMA slashed its base rate to the near record-low level of 0.86 percent in March when the US Federal Reserve cut its target range for the federal funds rate to zero to 0.25 percent — a level last seen in 2008 — in a bid to bolster the US economy from a looming recession as the coronavirus pandemic spreads globally.
However, major mortgage loan providers in Hong Kong have not followed suit in slashing the mortgage loan rates they charge to borrowers after the HKMA trimmed the base rate.
Besides rate cuts, the US central bank also pulled out the ultimate card — “quantitative easing infinity” — committing itself to unlimited purchases of US Treasurys and mortgagebacked securities if the previous $700 billion QE program fails to soothe market nerves.
“We stick to our forecast for mass residential prices to drop by 10 to 15 percent this year,” said Nelson Wong, head of research, Greater China and Hong Kong, at Jones Lang LaSalle.
“Given the dour market outlook and abundant supply, developers may have to lower prices when the bulk of their stock comes online for sale in the second half of this year,” he said.
In its semiannual Monetary and Financial Stability Report released in March, the HKMA said: “The coronavirus outbreak, coupled with the current economic recession and the rising unemployment rate, will dampen housing demand and new project launches. Some external risk and uncertainty factors, such as the pace of global economic growth and the international financial market volatility, may also affect housing market sentiment.”
Property analysts are getting more cautious as local economy has gone into recession
A wait-and-see approach
Despite the gloomy forecasts, other real estate analysts believe that market liquidity will again replicate the long-term asset bubble story, as it has in the last decade. Like the SARS outbreak, the coronavirus pandemic may have a strong impact even if shortlived, when the longer-term market outlook remains tied to domestic residential demand and supply dynamics as well as broader economic conditions.
“In Hong Kong, financial markets are still resilient despite a complex economic outlook. Interest rates are expected to stay low longer. Combined with ample liquidity and the low-base effect, overall investment demand is forecast to increase relatively from 2019,” said Marcos Chan, CBRE’s head of research for Greater Bay Area and Hong Kong.
Tom Ko, Cushman & Wakefield’s capital markets executive director, said, “The lack of incentives for transactions, with investors staying on the sidelines or bargain-hunting, and the landlords with strong holding power on the other hand due to low interest rates, explains the lull in the market. The coronavirus outbreak has exacerbated the cautious sentiment.”
Henry Mok, JLL Hong Kong’s capital markets senior director, agreed. “As developers have opted to avoid launching new projects due to virus concerns, prospective buyers have also taken a wait-and-see approach in view of the outbreak in the city. As such, home sales are likely to remain subdued until concerns over the contagion subside,” he said.
The HKMA said the very low interest rates may offer some support for asset markets, while market activity could rebound when the pandemic fades, as seen in the post-SARS period in 2003.
Despite the US Fed’s rate cut, growing concern about job security and salaries, combined with the negative wealth effect of the stock market rout, might have dented housing demand.’’ Carie Li, economist at OCBC Wing Hang Bank