The View | Hong Kong’s property market takes its cue from the Hang Seng Index, not protesters

Hong Kong may be suffering its worst political crisis since the territory reverted to Chinese sovereignty 22 years ago, but the city’s house prices are hovering near their all-time high.

While the Centa-City Leading Index, a gauge of secondary home values compiled by Hong Kong-based Centaline Property Agency, fell 0.3 per cent in the week ending July 7, it has risen a further 1.8 per cent since the anti-extradition bill protests erupted a month ago, taking the index’s gains since the beginning of this year to nearly 12 per cent.

The relentless surge in Hong Kong home values – a correction in the second half of last year proved short-lived, with prices snapping back in February – is mainly attributable to chronic undersupply in a market where there is huge pent-up demand. A report published by UBS in May forecast that annual housing demand in the city will reach 60,000 units over the next decade, far exceeding the government’s target of 45,000 units per year, and contributing to another decade of price gains.

However, from a sentiment standpoint, the Hang Seng Index has proved a reliable predictor of the city’s house prices. The benchmark gauge of the world’s fifth-largest stock exchange by market capitalisation, the Hang Seng is not just a proxy for the state of the territory’s economy – the financial sector alone accounts for almost 50 per cent of the index – it reflects sentiment towards the mainland, whose companies have dominated the index by weighting since 2007, according to data from Bloomberg.

Moreover, the Hang Seng has a history of overcoming periods of turmoil at home and abroad, from the Asian financial crisis in 1997-98 to the severe acute respiratory syndrome outbreak in 2003 and the global credit crunch in 2008. During the Occupy movement’s pro-democracy protests towards the end of 2014, the Hang Seng held steady, and has even risen 5.5 per cent since the first of several anti-extradition bill demonstrations rocked Hong Kong on June 9.

While other factors have had a strong bearing on sentiment in Hong Kong’s residential property market, such as the plunge in borrowing costs and the tide of money flowing in from the mainland, there has been a clear correlation between the performance of the Hang Seng and the city’s house prices. This has been most apparent during periods of severe selling pressure in the equity market.