Hong Kong Property Market Outlook for the Second Half of 2017

Jun 29 2017

29 June 2017 - The Centa-City Leading (CCL) property index once again hit a new high for the 17th straight week in a row reaching 159.88 pts. It is expected that another record will be set next week with a CCL of over 160 pts. CCL (small/medium) already exceeded 160 for the week of June 16th, and CCL Mass currently stands at 162.16 pts. CCL (large) is also at a record high of 158.33 and is expected to breach the 160 threshold in July.

Despite Hong Kong government measures to dampen the heated property market, housing prices are likely to remain high due to strong demand from the domestic market as well as mainland Chinese appetite for Hong Kong property as an investment vehicle. In addition to new stamp duty requirements, the Hong Kong government has closed a previously aggressively exploited loophole where first-time homebuyers were able to purchase multiple properties under a single agreement and only be subject to a single stamp duty levy.

The below are the key the factors affecting the Hong Kong real estate market (and our outlook). We outline additional, more detailed considerations in our comparison of the current market to the crash of 1997.

Interest Rates

The United States Federal Reserve has so far raised interest rates twice in 2017 and a third rate hike is expected before 2018. The Hong Kong Monetary Authority has increased its own rates to maintain the currency peg. Leading commercial banks raised their mortgage rates in May due to tightened mortgage lending requirements, but have yet to follow suit on recent interest rate increases. This has caused the HKD to trade at its lowest levels against the USD in 17 months due to capital outflows. There is conflicting opinion on whether or not commercial banks will increase their rates within 2017.

Chordio Chan Siu-ping, Head of Investment at Bank of China (Hong Kong) does not intend to raise interest rates this year. On the other hand, Ricacorp Mortgage Agency managing director, Wong Wing-yan, predicts local banks in Hong Kong will increase rates minimally in the fourth quarter.If capital outflows continue to persist and reduce the monetary liquidity in the Hong Kong market, the property market in Hong Kong might finally see some relief.

Housing Supply

Hong Kong S.A.R. continues to increase land supply for private housing. The land supply in 2017-2018 is expected to be sufficient to build nearly 32,000 flats, with 17,120 expected to be completed in 2017. Chinese developers now dominate the Hong Kong residential development, snapping up all HK$37 billion worth of government land sold for residential development in 2017. Local contenders have been outbid by Chinese companies, such as HNA Group Co. and Logan Property Holdings Co., for expensive land for development. Hong Kong developers have shifted to bidding for commercial real estate instead.

Economic Situation

The Hong Kong economy expanded by 4.3% in 2017 Q1 and is expected to grow by 2-3% this year, with strong capital inflows from China. The Chinese economy is expected to outpace Hong Kong with an IMF forecast of 6-7% increase in GDP this year. The IMF has forecasted a 3.5% GDP expansion for the global economy in 2017. The mild economic growth is expected to be sufficient to support the high cost of housing in Hong Kong in the short-term.

In conclusion, it is our opinion that that Hong Kong property will not see a downturn in the near term. However if prices continue to climb in the next 12 months, we may see a slowdown in the number of transactions – this would be an indication that either the market needs time to absorb the price increases (i.e. “new normal”) or a potential pullback. Note that the last several price declines have been limited (5-10%) and temporary – this may again occur as market expectations adjust, similar to stock markets.