Hong Kong property market unlikely to crash
Home prices expected to rise 8 per cent this year before a 10 per cent downward adjustment next year
Hong Kong’s property market is bracing for the impact of this month’s expected US interest rate increase.
The local realty market is very volatile, and it is all about sentiment. This summer’s stock market turbulence has affected buying confidence. The market has mounting concerns about the outlook for Hong Kong’s economy, with tourism and re-exports showing signs of weakness. The downside risk of interest rate normalisation is putting pressure on the real estate market.
We are very close to a turning point and prices are set to soften in 2016. I do not expect a repeat of the crash, but a soft landing. Prospective buyers need to be aware that the US interest rate rise will not be a one-off event. Interest rate up-cycles have never been a one-time event, dating back to when Alan Greenspan served as chairman of the US Federal Reserve. Colliers believes interest rates will edge up steadily by an aggregate total of 100 basis points in 2016. Given a less negative real interest rate environment, with real interest rates moving closer to 0 per cent, prices will start to fall next year, and we see the second quarter as the critical turning point for the Hong Kong property market.
Nevertheless, the likelihood of a dramatic fall off following 2015’s all-time high seems unlikely, as excess liquidity throughout the global economy, without any oversupply and with construction costs remaining high, will prevent a drastic decline of 30 per cent to 40 per cent in prices.
The situation today differs from previous property market meltdowns, when borrowing costs and debt levels were high. In 1997, mortgage rates were around 13 per cent. Today rates sit comfortably at 2 per cent. Government curbs on mortgages have also kept debt levels low. An important precondition for a bubble in any asset class is a high level of leverage. Since Hong Kong has low levels of leverage, the prospect of sharp price decline is limited. For the residential market, prices are expected to rise 8 per cent this year before a 10 per cent downward adjustment next year.
Why will the change in the cycle to higher interest rates drive down prices this time round? The previous cycle of higher US interest rates that occurred between 2004 and 2006 did not drive down local home prices. Instead they jumped 43 per cent over the course of that period. The difference between now and then is that home prices were subject to a 62 per cent drop between 1997 and 2003, before the upward cycle in interest rates. This time round, prices have hit record levels, with cumulative growth of 184 per cent since 2009, underpinned by the unprecedented ultra-low interest rate environment. This has limited buyers’ affordability, and interest rate normalisation is exerting an influence on the housing market.
With the prospect of a downturn in 2016, the office sector will be the most resilient sector among all property types in Hong Kong, thanks to the endless stream of liquidity from a variety of sources, both outside Asia and within. These include sovereign wealth funds, real estate investment trusts, insurance and banking firms, as well as high-net-worth individuals from across the region. Multinational companies, such as insurance firms, are assessing the feasibility of purchasing for owner-occupation as a long-term strategic move that optimises liquidity, rental affordability and risk management. Mainland investors will remain a force in strengthening the market for office acquisitions and their offshore buying spree will intensify. They already have extensive domestic real estate exposure, so offshore investment allows them to diversify their risks.
Chinese insurers with strong cash flow and purchasing power will continue to exert greater influence abroad. They have benefited from new regulations allowing them to invest in foreign property.
For all these reasons, Hong Kong Grade-A office prices are predicted to fall by only 5 per cent in 2016.
Joanne Lee is a senior manager, research and advisory at Colliers International