30 October 2019 - Continued mass protests across Hong Kong, coupled with worries for global economic slowdown have taken a serious toll on the confidence in Hong Kong’s property market in recent months. Scores of articles have been written in the press describing poor sales launches and headline transactions at steep discounts to asking prices. In order to boost sales, property developers have indeed been offering discounts on their new project launches, with a high degree of success. Although this practice may persist for the rest of the year, it is not the sign (nor the trigger) of a dramatic crash in prices.
Four months of protests in Hong Kong have undoubtedly cast a cloud across the city’s financial and property markets. According to the Lands Department, overall property sales transactions in September amounted to HK$36.4 billion, representing a 3-year low. The number of residential sales in September was 16% lower than in August and 29% lower than the monthly average over the last 5 years.
However, prices have moved downwards to a much lesser degree. The latest data available on the overall residential market(1) indicated that, as of August, average prices had fallen a mere 2% from their all-time high in May. Another indicator, the Centa-City Leading Index, showed a decline of 4% in secondary private home prices over the last 7 weeks, suggesting that September may have seen somewhat larger price declines. Although these certainly point to a softening in prices – logical in the current environment – it is a far cry from a crash. Finally, as an indication of the rental market, a report from Savills cited luxury rentals on as falling only 1.6% in Q3 2019 on Hong Kong Island, and 3.6% in Kowloon.
Prices and volumes often do not move in tandem. Yet, articles will often cite a move in one or the other as defining current sentiment, which can mislead the casual market observer. Neither one is, individually, an absolute metric. Just look at the last 7 years since the government began implementing cooling measures. Monthly sales volumes have for the most part been very low – hovering around (or below) SARS levels. However, prices have risen dramatically. So why would a decline in volumes now be evidence of a market crash?
Other recent headlines have pointed to specific leases or sales concluded at 20-30% discounts as “evidence” that we’re in the midst of a crash. Referencing isolated data points this way is ridiculous. These were isolated cases that don’t define a trend, and the market-wide data listed above clearly shows that prices have barely receded from their highs.
In any market there will always be individual owners who, for whatever reason, are pressured and will offer a steep discount to ensure a swift sale. Take such headlines with a large grain of salt and instead look at longer-term, market-wide statistics - which in this case show relatively modest price declines in the last 4 months.
To understand the aggregate sentiment of the market, let’s look at recent first-hand property sales. In mid-August, Billion Development sold all 354 flats on offer at The Aurora in Tsuen Wan, with some 8,900 buyers reported as having registered bids. The flats were priced at approximately 10% below the prevailing market prices in the neighborhood. Considering the ongoing instability in the city at that time, the pricing strategy was very successful and has been adopted by other developers' new residential property launches.
Another leading developer, Wheelock, recently priced its Tseung Kwan O projects about 8% lower than other recent sales in the area and has sold over 80% of the 816 flats in recent weeks – a solid result given the tepid environment.
These are simply examples illustrating that there is still substantial demand for properties, and an 8-10% discount has been sufficient downside protection to convince many people to invest for the long term.
Indeed, the government is looking to reinvigorate demand for property investments. Carrie Lam’s 16 October policy address announced an increase in the cap on properties eligible for 80% and 90% LTV mortgages (to $10M and $8M, respectively) under the Mortgage Insurance Programme. In other words, it’s now be easier for buyers in those ranges to finance purchases for second-hand homes.
The reality is that property values in Hong Kong have risen over the last several decades because of undersupply relative to demand. This is the counterweight to the recent decline in active buyers, and there are limited signs of this changing. A prominent local advocacy group and non-profit organization, Our Hong Kong Foundation, warned in a report published in April that future new housing supply is forecast to be 10% lower than the previous rolling 4 years.
The policy address also stated the government will provide 10,000 “transitional housing” units over the next three years. While this is a positive step towards providing housing for the part of society who needs the most help, it will have a marginal impact on real supply. To put it in perspective, with approx. 1.2 million private residential units in Hong Kong (excluding public housing), an additional ~3,300 units per year only increases supply by 0.25% annually – far less than population growth (~1%) and GDP growth (3-4%/year, though this year will clearly be much lower.) If one also considers the approx. 1.3 million public housing units (~2.5 million private + public), the impact on total supply is even smaller.
This simply means that supply is not something that is increased easily or quickly – which in turn is why prices have risen except in times of extreme crisis (such as the 1997 Asian Financial Crisis or the 2008 GFC).
There are much larger, external factors that support long-term (cautious) optimism. US-China tensions seem to have stabilized, with signs of a phase one agreement soon. Interest rates remain low, supporting assets prices generally. And with US stock markets near record highs, global financial sentiment appears to remain stable.
In short, Hong Kong’s property market is undergoing turbulence, not a crash. It’s possible things will get worse, but it’s far from obvious that they will. The impact of the protests on both sentiment and the underlying economy are indisputable and we don’t yet know to what extent unemployment (which has been at record lows) will rise. But the government may use other tools to support property ownership, and ultimately many people are eager to own real estate. Unless that desire fundamentally changes, any correction in prices is likely to lead to buyers emerging and stabilizing the market, at least in the medium term.
(1)Source: Rating and Valuation Department