15 April 2020
The Signs of Market Optimism
Seems like the drumbeat of bad news will never end with the coronavirus taking centerstage in everyone’s lives here in Hong Kong and around the world. This, coming on the heels of last year’s widespread social unrest throughout the Territory, is sure to completely decimate the local real estate market in 2020 - or so some industry pundits have been saying. Yet, despite the dire warnings about an imminent housing collapse that would seem to scare people away from buying new homes, the reality on the ground reveals signs pointing to the contrary.
First-hand Property Transactions During the Outbreak of Coronavirus
Just recently in early March, Wheelock Properties announced the sale of 189 of 208 flats, (90 per cent) on offer at their Ocean Marini project in Tseung Kwan O, resulting in purchases totalling close to HK$1.59 billion (US$204 million). This sale was no doubt given a strong boost due to attractive discounted prices and buyers’ anticipation of lowered interest rates in Hong Kong. And while it certainly should not be seen as a definitive indicator of an imminent recovery, it does indicate that cash-holding individuals exist in the market and have the confidence to invest. Wheelock’s second batch of sales, a few weekends later, had only slightly less success (80% sellout) though this was largely attributed to a significant spike in virus cases at that time, leading many interested buyers to remain at home.
Other property companies have had similar successes recently. The Richmond, a 90-unit project from Henderson Land Development, was launched onto the market in the Mid-Levels on January 21st this year. All 45 of the units offered thus far were quickly sold, indicating that despite the protests there was still strong demand for new, smaller units in mid-levels. Flat sizes ranged from 206 to 300 sq ft. and the units sold for between HK$6.3 million and HK$9.7 million.
Low interest rates remain a significant consideration in buyers’ minds, since it makes home ownership more affordable and more attractive than renting over time. With average sales prices having only fallen ~7% since the onset of the protests (as of February 2020 data), this points to a general resiliency and confidence in the long-term outlook. In addition, the US Federal Reserve’s recent move to cut interest rates to near zero per cent coupled with the reset of Hibor to around 1.73 per cent (as of March 19) will no doubt tempt potential home buyers despite gloomy macro-economic circumstances. This relative stability in prices is despite the volume of buyers having dropped meaningfully since the protests began, with there being ~50% fewer monthly transactions of late. In other words, sellers have remained confident enough to not panic-sell, which would have led to much steeper price declines.
In terms of rentals, although many tenants are seeking steep discounts in this post-virus market, landlords (like sellers) are not panicking either. Rental prices have fallen ~8% since the protests started despite many prospective tenants initially thinking they can find properties at 30-40% discounts to what they were a few months ago. Significant fears relating to the virus does not directly translate to prices falling significantly. In fact, if fewer people are willing to buy, this naturally increases the net number of renters, partially offsetting reduced housing budgets or the (small) number of people fleeing Hong Kong.
The reality is that prices are a result of supply and demand. Supply has not changed, and demand may have softened in some pockets, but there remain buyers in the market willing to invest at or near current prices.
While these latest developments are hardly a bellwether marking the return of a thriving real estate market, they do, however, point to there being some optimists in the market. In past economic downturns, this pent-up demand has quickly stepped in as prices fell, leading to a smaller-than expected drop in real estate prices, and a swift recovery.
Personally, I am quite concerned about the US economy and a potential cascade of debt defaults leading to a recession. Higher interest rates, unemployment and inflation are all possible outcomes and these would have a huge impact globally, including in Hong Kong. But these are not certainties, and my opinion is of limited value. It’s the market’s opinion that matters and there are those who remain cautiously optimistic (for now), despite the fears around the virus.