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Hong Kong property

Hong Kong home prices drop – ending bull run of 28 months as world’s priciest market reaches tipping point

First home-price declines in more than two years seen in August. Smallish flats on Hong Kong Island take a big hit; skittish owners offer deep discounts to unload properties.

PUBLISHED : Friday, 28 September, 2018, 10:41am
UPDATED : Friday, 28 September, 2018, 11:30pm

Hong Kong’s prices of lived-in homes fell in August, marking their first decline since March 2016, as the US-China trade war, accelerated launches of new flats, and higher mortgage rates pushed the world’s most expensive residential property market to a tipping point.

The city’s Rating and Valuation Index, which tracks the prices of used homes, dropped by 0.6 point to 393.9 last month, from 394.2 a month earlier, according to data by the Rating and Valuation Department.

That ended a 28-month property bull run, where a decade of cheap money drove residents to seek better returns for their investments, sparking home prices to surge by as much as 45 per cent over the period.

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For homes smaller than 430 square feet, those on Hong Kong Island had the biggest drop of about 2.5 per cent, to HK$17,232 (US$2,201) per square foot from HK$17,671 per square foot on average, according to data from the department.

“Home prices on Hong Kong Island, the prime location, tend to drop early and by a larger extent,” said Billy Mak, associate professor of finance and decision sciences at Baptist University. “Small homes in the New Territories, which are relatively cheap, remain in large demand.”

Data of the price declines came on the heels of Hong Kong’s commercial banks raising their prime lending rates for the first time in a decade. The declines also vindicated forecasts by investment banks Citibank, UBS, Nomura and CLSA, which have all predicted the end of the bull market.

Analysts blamed the US-China trade war, rising mortgage rates and the volatile stock market for the drop.

“The impact of the China-US trade war [on home price] would be reflected gradually,” said Derek Chan, head of research at Ricacorp Properties. “The latest rises in prime rate will also hit buying sentiment further and slow the buying decisions among sellers and first-time buyers in the short term.”

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The drop will widen to about 0.5 per cent in September and October, and even about 3 per cent in November to December, said Chan.

The volatile stock market and rising Hong Kong interbank offered rate, which increased mortgage rates, also contributed to the decline in August, said Raymond Cheng, head of Hong Kong and China research and property at CGS-CIMB Securities.

Other analysts predicted that home prices will weaken.

The end of excess liquidity in Hong Kong is likely to be one trigger for a bigger drop, according to S&P Global Ratings, which expects the drop to grow to 5 per cent to 10 per cent over the next 12 months, from the peak in the third quarter of this year.

“Abundant liquidity has been a key factor driving up property prices in Hong Kong, but this support is now receding,” said S&P Global Ratings analyst Cindy Huang. “While an interest hike has long been anticipated and the increase is marginal, it suggests that the decade-long ultra-loose monetary conditions are over.”

The rating giant noted that soft prices of recent launches signalling developers’ less-aggressive stance on pricing to sell more units will contribute to lower home prices.

“Following the government’s plan for a vacancy tax in June this year, developers are even more keen to clear any completed inventory,” Huang said. “Rising supply combined with weaker buyer sentiment due to rising rates and economic uncertainty from trade wars will likely further dampen property prices.”

Homeowners have been slashing prices to get out before what they expect to be even bigger declines.

On Friday, some homeowners slashed prices to sell at large discounts of up to 20.4 per cent.

One flat of 1,111 square feet in saleable area at Sheung Shui’s Gold Parkview development changed hands for HK$9.55 million, down HK$2.45 million, or 20.4 per cent, from the asking price.

“The owner would rather offer greater discounts to unload stock, knowing that home prices have been in decline with the ‘wait-and-see’ attitude dominating in the market,” said Ken Chan, regional director at Ricacorp Properties.

Another flat of 429 square feet at the Dawning Views development in Fanling was sold at HK$5.96 million, down HK$645,000, or 9.8 per cent, from the asking price.

One flat of 478 square feet at Hang Fung Building in Happy Valley sold at HK$12 million, down HK$800,000, or 6 per cent, from the asking price.

The willingness of owners to drop prices so much prompted worries that the local economy may take a hit, amid other worrying factors. These include the worsening China-US trade war, the rising prime rate, weakness in the mainland economy, a losing streak in the city’s stock market and predictions by analysts that home prices may drop 10 per cent.

“It’s about the market sentiment. If home prices and stock prices keep dropping, then people’s wealth will drop,” said Lee Shu-kam, associate head of the department of economics and finance at Hong Kong Shue Yan University. “The economy will shrink when the people reduce consumption.”

Lee said a sustained drop would especially threaten financially stretched homeowners, such as those who put a mortgage on their old flat to finance buying another, who may “start to have financial difficulties and have less confidence to the outlook of the market”.

“If the lack of confidence in market outlook dominates, home prices will drop even more.”

Lee has predicted home prices would drop by a low single-digit by December with a sharper 10 per cent decline possible in the first quarter of 2019 from the prior quarter.

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