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.

The sharpest downturns in Hong Kong’s housing market – in 1998, 2008 and 2015 – have all coincided with steep declines in the Hang Seng.

Flats smaller than a parking space stay popular despite protests

A report published earlier this month by Jones Lang LaSalle, a property adviser, notes that the benchmark index has been “a leading indicator” of home values, with a close linkage between quarterly movements in the Hang Seng and secondary house prices in the following quarter.

Jones Lang LaSalle notes that whenever the equity gauge has fallen more than 10 per cent quarter-on-quarter, house prices have suffered a contraction in the next two quarters.

A report by Knight Frank, another real estate adviser, published last January draws similar conclusions. Having analysed seven factors that influence home values – including interest rates and Hong’s Kong’s gross domestic product – the study found that the Hang Seng correlated most closely with house prices.

If the stock market is the key determinant of sentiment in the housing market – and the evidence suggests that it is – prices are likely to continue their upward trajectory in the coming months.

One of the biggest threats to Hong Kong house prices is no longer present. The decision by the Federal Reserve to put its interest rate-increase campaign on hold, and signs that it intends to cut rates later this month, has fuelled a fierce rally across asset classes. A reduction in US rates would almost certainly prompt the Hong Kong Monetary Authority – which moves in lockstep with the Fed because of the territory’s currency peg to the US dollar – to follow suit. This would bring down funding costs, easing pressure on mortgage rates.

However, the Hang Seng is driven not just by the conduct of American monetary policy, but also by the state of China’s economy.

Hong Kong’s prime office market wobbles as Chinese firms scale back

The two most recent corrections in Hong Kong house prices – in 2015 and 2018 – were triggered by concerns about financial stability and growth in the world’s second-largest economy. While the US-China trade war has eased somewhat, both sides remain far apart on the most sensitive issues bedevilling relations between Washington and Beijing. Chinese policymakers, moreover, are still struggling to stabilise the economy while eschewing the full-throttle approach to stimulus favoured previously.

Make no mistake, another major China-induced sell-off in Hong Kong’s equity market is only a matter of time.

Still, the Hang Seng has proved resilient in the past, and Hong Kong house prices continue to rise. The correlation between the two is unlikely to break down any time soon.

Nicholas Spiro is a partner at Lauressa Advisory