Hong Kong has long held the dubious honour of having one of the most expensive and unaffordable property markets in the world.
In 2017, its house price-to-income ratio was 18.1, meaning that at the city’s median annual household income of HK$300,000, the median cost of a home was more than HK$5.4 million.
Going into 2020, the general outlook was that housing prices would fall. The uncertainty generated by developments in local and international politics had caused many Hong Kong investors to turn away from the local market, instead looking overseas for stability and robustness.
This trend began in the second half of 2019, where capital values of mass and luxury residential fell due to weakening market sentiment. Historically, the Hong Kong luxury residential market has been largely backed by Chinese buyers.
However, China’s tightened capital outflow policy and the 2019 US-China trade war subdued demand from mainland investors, a shift that persisted into 2020.
Indeed, the first quarter of 2020 saw Hong Kong’s residential property prices falling by 3.12% year-on-year, in contrast to an annual rise of 0.28% a year earlier.
According to Hong Kong’s Ratings and Valuation Department, the same quarter saw the number of primary sales falling by 57.4% year-on-year, and the value of sales falling by 59.3% year-on-year.
This result was to be expected; the coronavirus outbreak, in conjunction with market-cooling measures and the political climate carried over from 2019, caused plunging demand and construction.
However, as the year progressed, house prices rose by 2.63% into the third quarter of 2020. The residential real estate market remained surprisingly resilient and unaffordable – the UBS Global Real Estate Bubble Index released in September 2020 gave Hong Kong a score of 1.79, where any score above 1.5 indicates a significant risk of a housing bubble.
Clearly, the gloomy market conditions were insufficient to halt the upward trajectory of Hong Kong’s property prices for long, and the market seemed to have successfully weathered the storm.
What happened?
Firstly, while the residential real estate market seems impervious to prevailing economic factors, the commercial real estate market is not.
The fortunes of the retail and office sector are directly tied to the broader economy, and the contraction of the Hong Kong economy has been accompanied by slowing leasing demand, with the office market vacancy rate reaching a twelve-year high.
Retail properties have been hit hard with tourism and business travel being brought to a standstill, posing challenges for commercial property developers.
The contrast between the two markets demonstrates that the resilience of the residential real estate market is a result of unchanging structural factors determining prices, rather than factors dependent directly on economic performance.
Hong Kong is one of the most densely populated areas in the world, which causes a fundamental supply-demand imbalance. The scarce land area has brought about a situation in which virtually all land is leasehold, and buyers must bid for leases, resulting in high prices as developers must compete to get hold of land plots.
Currently, developers have also slowed the building and launch of properties out of caution.
Unfortunately, the tightness of the supply of housing is matched only by the strength of its demand. According to Bloomberg, Hong Kong’s target for housing in the next 10 years is 430,000 apartments, and under the assumption that this target is met, that still comes to 10% less than projected demand.
The supply demand imbalance has led to properties such as the Pavilia Farm development in the New Territories district selling out all units within six weekends from October 2020 for a grand total of HK$23.8 billion (US$3.06 billion / £2.24 billion).
The year ahead
Hong Kong property prices are predicted to make a steady recovery in 2021, with both the commercial and residential real estate markets expected to improve as the economy rebounds.
UBS, for one, expects Hong Kong home prices to be flat to positive, with a mid-single-digit increase by end-June 2021 possible.
The rate of foreclosures is also likely to remain at low levels. The Hong Kong dollar has been pegged to the US Dollar since 1983, so when the US Federal Reserve interest rates move, so too do Hong Kong’s interest rates.
With the Fed maintaining its target for the federal funds rate at near-zero in December 2020, financing costs are very low. With most home buyers being moderately leveraged, existing holders should be able to service their debt.
With mainland buyers falling back as political tensions continue and most of Hong Kong’s 600,000 Western expatriates preferring to rent, sales are being sustained by locals.
This means that the interaction of the structural factors causing the resilience of the residential real estate market is likely to continue fueling Hong Kong’s seemingly never-ending housing boom.
One trend that is likely to be seen is an increased local interest in overseas property markets, brought about by political uncertainty.
The United Kingdom, in particular, has always been seen as a stable overseas investment destination, and its appeal has only increased after the UK government launched a special visa for around three million people in Hong Kong in 2020.
According to a Home Office study, as many as 322,000 Hong Kongers will move to the UK between 2021 and 2025. Other preferred destinations are Canada and Australia, which have also eased visa restrictions in response to China’s new security law.
Overseas property purchases from this group are likely to be for permanent residence and not solely investment, possibly easing pressures on the Hong Kong residential property market.
Fundamentally, an economic rebound and an overall recovery of the property market highly depends on when Hong Kong can open its borders and stop lockdowns.
However, the balance of risk for Hong Kong’s economic prospects is tilted to the downside, as the country faces rising policy uncertainty, fraying social cohesion, and greater competition from mainland China.
This means that the commercial real estate market, subject to cyclical pressures, will take longer to recover, as the passing of the pandemic will not put an end to Hong Kong’s political troubles.
The divergence between the residential and commercial real estate markets will then continue into the future, even as the Hong Kong property market continues its strong upward trajectory of the past few years.
