15 November 2018 - The recent market sentiment is one of uncertainty with expectations of a correction. News of landlords slashing prices are reported almost daily and market analysts are speculating on the magnitude of a property market downturn. In general, a 5 to 15% decline is considered a technical correction (we’ve seen three in the last eight years), while a decline of over 20% is regarded as a bear market correction. During the start of a correction, it’s impossible to tell which type will unfold, but we can learn from history to make wiser decisions.
Since the 2008 Global Financial Crisis, the Hong Kong property market has gone through three notable corrections. The first occurred in 2011, triggered by the European Debt Crisis and shaken confidence, resulted in an average price drop of 6.5%. The next began in 2013 after Ben Bernanke, chairman of the Federal Reserve, stated that the US should stop quantitative easing and raise interest rates. The strong US dollar and expectations of interest rate hikes led to transaction volumes falling approximately 40% that year, though prices only declined by 5.2%. Finally, the third in 2015 was when China’s growth showed signs of slowing which, together with debt, political concerns and the unexpected depreciation of the RMB, led to a 50% drop in Chinese stock markets. Fear spilled into the Hong Kong stock market, with the HSI losing a third of its value. Property prices react more slowly to economic changes, and Hong Kong’s property market fell a modest 13.2% over a brief six-month period before positive sentiment returned to both the stock and property markets.
Government cooling measures in October 2009 also affected corrections indirectly and probably tempered them. Initial skepticism towards the longevity of the measures combined with low levels of debt (limited pressure on sellers) meant sellers’ price expectations remained high. However, it was significantly more challenging for purchasers to invest. The result was a dramatic fall in transaction volumes from 2010 to 2016; the only purchasers had high levels of confidence or a lot of capital, which ironically led to prices rising significantly. This also meant pent-up demand in the market and during each correction buyers stepped in quickly once prices fell, dampening the declines.
Three things to keep in mind: Firstly, three corrections in ten years should tell us that corrections in the property market are normal. Don’t panic! Second, meaningful corrections are typically caused by a major, systemic crisis of confidence. The 1997 Asia Financial Crisis, SARS, 2008 GFC—only these were strong enough shocks to cause major property declines. Thirdly, they occur after a major stock market decline, typically lagging by few months. The stock market had fallen approximately 20% from its peak this year, so it's not surprising for the property market to undergo some level of correction.
Technical Correction or Bear Market?
A bear market has historically only followed major global or regional crises. Here are the main indicators to monitor:
- US-China trade war. Will this come to an end soon, or escalate into a global crisis?
- Hong Kong stock markets. Will it keep falling, stay sideways or bounce back soon?
- Interest rates. Will they increase dramatically or gradually? Remember, rates initially rise because of a recovering economy, which in turn increases property value. Historically, rates have had to reach high levels (~8%+) before they materially hurt property markets.
- Sales transaction volumes. These have been extraordinarily low for several years due to cooling measures, only returning to average levels over the last year or so. There may still be demand waiting in the wings, which may again lead to a smaller correction than seen in stocks.
