Hong Kong: Price History

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Apartment bull market now over?

Hong Kong has been experiencing one of its occasional euphoric property market surges. Residential prices rose by 24.95% during the past year (2007), a sudden pickup after the rather stagnant market conditions prevailing in 2006 (4.1% growth). These figures do not reflect the vibrancy at the top end of the market, where Knight Frank report prices in the year to March 2008 are up 44.8% in Mid-Levels, and 37.5% in Island South.

As in all previous booms, prices of the largest (Class E) apartments have risen most drastically. They are now valued more highly than during their pre-crisis peak, whereas the smallest apartments (Class A) are still well below peak values (see table).

Hong Kong’s residential prices are now 91.19% up in the five years to January 2008 (or 81.52% in inflation-adjusted terms).

Nevertheless now (April 2008) transaction levels are falling, and banks have tightened lending - especially to expatriates without HK sourced income. The decline seems to be most visible in the high-end market, which is likely to be most affected by the credit crunch, by firing at investment banks, by a US economic downturn, and which is anyway more volatile.

Property sector stocks have become less buoyant. Sun Hung Kai Properties recently revealed a decline in home launches, signaling that its annual income is likely to drop.

It is difficult to tell whether this is a hiccup, or worse.

The Hong Kong market is highly linked to US interest rates. Rising US rates prompted a pause in the market in 2006. The subsequent decline in rates associated with the sub-prime crisis and the threat of US recession also was a significant factor in recent sharp price rises.

Property cycle

The rather dramatic price-rises of the last two years must be put in their proper perspective: From the peak of Hong Kong’s spectacular pre-handover property boom in 1997 to the trough in 2003, Hong Kong residential property prices fell by no less than 66% in nominal terms.

Annual declines were:

• 1998 – 32% price decline
• 1999 – 8.5% price decline
• 2000 – 14.5% price decline
• 2001 – 10% price decline
• 2002 - 13% price decline
• 2003 – 17.6% price decline

The price index then started inching upward. By December 2003, the property price index finally registered growth, a miniscule 1.9% rise. Then the impressive recovery happened in 2004 and continued to 2005, when there was a pause, followed by the present spectacular boom.

Rents and yields

Prices have risen over the past three years somewhat more than rents. Indeed prices of higher-end apartments have risen by strikingly more than rents.

Mid-Level apartment gross rental yields are now at 3.7% for 120 sq m. apartments, according to Global Property Guide research (April 2008) Yields on Peak apartments are around 2.9%.

Our yields figures are closely in line with those issued by the Rating and Valuation Department.

Mortgage interest rates

Hong Kong’s mortgage interest rate went up and then down again during the past two years - between January 2005 to May 2006 the mortgage interest rate was raised from 2.50% to around 5.25%. The surprising thing is that the boom took place despite this rise. Since September 2007, Hong Kong mortgage rates have fallen rapidly, to their present rate (around 2.75%)

Mortgage interest rates paid by Hong Kong borrowers have fallen from 11% in the post-crash environment of 1998, to under 3% at their lowest point. The fall in mortgage rates was significantly larger than that made possible by the fall in US rates.

The causes of the dramatic fall in mortgage interest rates were threefold:

1. The elimination of the Interest Rate Rules of the Hong Kong Association of Banks (popularly known as the “banking cartel”);
2. Measures taken by the Hong Kong Monetary Authority to relax market entry criteria; and
3. The formation of the Hong Kong Mortgage Corporation (HKMC), which allowed banks to offload parts of their mortgage portfolio to the HKMC and securitize the rest.

Almost all Hong Kong mortgages (99% of the total US$67 billion mortgage pool) are on floating rate terms, so these changes in interest rates have a marked effect on affordability.

Construction

New development completions have been weak in Hong Kong over the past three years, as before the pre-Asian crisis euphoria in 1997, which may also partly explain the buoyancy of residential prices.

Land sales

The British hand-over in 1997 has in theory lifted the annual supply constraint on new land sales (although in practice this was retained in response to the market crash).

This means that there will now be a potentially greater supply of new properties coming on stream.

In our view this somewhat limits the market’s upside. In fact we believe that Hong Kong is at present an unattractive destination for residential investment, for the following four reasons:

• Hong Kong’s per square meter apartment prices are among the highest in the world
• GDP growth is unlikely to resume at the high rates of the early 1990s
• Land supply is likely to be more liberal under the post-British era administration.
• Gross rental yields are low.
• The population is ageing However, we gave this same advice back in 2006, and since then the Hong Kong residential property market has appreciated by well over 50%. Hong Kong retains an infinite capacity to surprise.

Hong Kong - more data and information

• Hong Kong house prices, rents, and letting income - real data!
• How expensive are houses in Hong Kong, compared to the rest of Asia?
• How much rent can be earned from Hong Kong property, compared to the rest of Asia?

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