Concrete AnalysisWith Hong Kong’s property market on verge of huge correction, government must take steps to cushion downside risks

As a demand driven market, Hong Kong’s property market is highly influenced by the city’s economic performance. And as a small and open economy, its performance in turn is closely tied to the ebb and flow of external environment.

This is evident when looking at the historic performance of the property market, where all broad-based market corrections over the past 30 years have followed significant external economic events.

After almost 10 years of uninterrupted growth, Hong Kong’s economy is now at a crossroads. A protracted US-China trade war and the anti-government protests since June have seen growth grind to a halt.

The property market has recovered and broadly grown in tandem with the underlying economy since the 2009 financial crisis. Market rents and capital values have at least doubled across all sectors over the past decade and remain at near record high levels. The only outlier has been the retail property market which has tumbled by more than 40 per cent since peaking in 2014; a result of Beijing’s anti-corruption measures.

With Hong Kong’s growth forecasts being revised downwards, there is a growing consensus that the property market has reached a cyclical peak. Signals are also appearing in the government land sales market, which is often viewed as a barometer for the property market’s medium-term prospects.

The lack of a rental growth story has led to investors stepping back to reassess the market situation. Weakening demand for commercial property has seen vacancy rates steadily rise across the market. Office rents look like they have peaked and retail rents have slid over the past six months after stabilising in the middle of last year. The appetite of buyers to further chase down yields has evaporated.