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Jul 04, 2015

Hong Kong property prices surging again!


Hong Kong house price annual Hong Kong´s residential property price index rose 21.27% (17.91% inflation-adjusted) during the year to April 2015, sharply up from an increase of just 2.42% (-1.18% inflation-adjusted) during the same period last year, according to the Ratings and Valuation Department (RVD).

Unsurprisingly, smaller-sized properties had the highest price rises. Prices of apartments smaller than 40 sq. m. rose by 17.3% during the year to April 2015, and apartments 40-69.9 sq. m. rose by 17.6%. Prices of apartments 70-99.9 sq. m. rose by 13.1%, while prices of apartments 100-159.9 sq. m. rose by 10.5%. On the other hand, average prices of apartments larger than 160 sq. m declined by 11.25%.

AVERAGE HOUSE PRICES, APRIL 2015

PROPERTY SIZE AVERAGE PRICES (HK$/sq. m) YEAR-ON-YEAR CHANGE (%)
HONG KONG KOWLOON NEW TERRITORIES HONG KONG KOWLOON NEW TERRITORIES
Less than 40 sq. m 145,502 115,474 104,947 17.30 18.62 21.16
40 – 69.9 sq. m 148,839 118,307 93,025 17.59 16.40 21.48
70 – 99.9 sq. m 170,748 152,303 99,579 13.12 7.89 13.14
100 – 159.9 sq. m 201,418 187,351 96,287 10.53 26.81 7.89
Greater than 160 sq. m 193,015 175,436 103,299 -11.25 -15.77 48.57
Source: Ratings and Valuation Department (RVD)

Hong Kong´s residential property market has risen relentlessly for several years. From 2008 to 2013, house prices skyrocketed by 134% (95.7% inflation-adjusted), driven higher by a flood of money from developed markets´ central banks in the wake of the global financial crisis. However, the market slowed sharply in the first half of 2014, with house prices rising only by 2.9%, due to government cooling measures.  But the housing market bounced back quickly in the second half of last year.

Hong Kong’s currency peg to the dollar kept borrowing costs near record lows, fuelling continued property demand.

According to CBRE, strong occupier demand, coupled with a structural supply shortage and lack of fast-track supply replenishment solutions from the government, will continue to fuel the housing market this year.
But investment banks and other analysts remain cautious. They warn that Hong Kong’s property market could be facing a downturn in the coming years, due to several factors, mainly:

  • the increase in housing supply;
  • the intensification of government crackdowns on the wealthy in mainland China;
  • intensified competition from other global cities like Tokyo, Singapore or London;
  • Hong Kong’s economic slowdown;
  • the potential interest rate rise in the U.S., and;
  • the continuing implementation of government cooling measures.

Hong Kong´s economic growth slowed to 2.1% during the year to Q1 2015, from 2.4% growth y-o-y to Q4 2014, mainly due to falling retail sales and weak exports. Hong Kong´s economy is expected to grow by 2.8% this year, after 2.3% in 2014 and 2.9% in 2013, according to the International Monetary Fund (IMF).

Hong Kong property prices rose 274.2% between 2004 and April 2015!

In 2009, while property prices were taking a nosedive across the U.S., Hong Kong’s housing market was going into overdrive.

  • In 2009, property prices surged by 28.5% (26.6% inflation-adjusted)
  • In 2010, house prices rose by 21% (17.6% inflation-adjusted)
  • In 2011, house prices rose by 11.1% (5.1% inflation-adjusted)
  • In 2012, property prices skyrocketed by 25.7% (21.1% inflation-adjusted)
  • In 2013, property prices rose 7.7% (3.3% inflation-adjusted)
  • In 2014, property prices rose 13.6% (8.3% inflation-adjusted)

Hong Kong’s property market has become the world’s most unaffordable, according to the Demographia International Housing Affordability Survey of January 2015. Average home prices were 17 times gross annual median household income, up from 12.6 times the previous year and the highest level ever recorded in the survey´s 11-year history.

Hong Kong is the world’s second most expensive city for expatriates to live in, according to Mercer’s 2015 Cost of Living Survey, and the most expensive in the Asia Pacific.

Housing demand has been propelled by a combination of stringent government regulations on development, low interest rates, and currency stability; while the supply of land, which the government controls, continues to diminish.

Hong Kong´s government has attempted to lean against the property price rises in recent years, with the following measures:

  • In November 2010, the government imposed a ´flip tax´ of 15% on properties resold within six months, and doubled stamp duties to 8.5% on properties worth HK$20 million (US$2.6 million) or more.
  • On October 26, 2012, the government introduced a Buyer’s Stamp Duty (BSD), imposing a 15% tax on property purchases made by foreigners.
  • In February 2013, the government doubled the stamp duty on all property transactions worth more than HK$2 million (US$257,902), though this measure ended in May 2014.
  • In April 2013, the Residential Properties (First-hand Sales) Ordinance which aims to shield buyers from dishonest sales practices came into full effect.
  • In May, 2014, the government proposed to relax the "six-month" timeframe for owners who wish to upgrade their flats. Homebuyers do not need to pay DSD if their old unit is sold within six months of signing a formal agreement.
  • In February, 2015, the government required buyers of self-used residential properties valued under HK$7 million (US$900,000) to make larger down payments, after previous rounds of cooling measures aimed at more expensive housing spurred demand for smaller properties.

These measures have not stopped property price-rises, which mainly stem from strong pent-up demand from local end-users exempt from the cooling measures.  The luxury market, on the other hand, has lost steam, due to reduced demand from external investors and wealthy mainlanders affected by the government´s measures.

Property sales rising again

Hong Kong property sales

Transactions soared by 37% y-o-y during the first four months of 2015, based on RVD figures, while sales values surged 54% y-o-y to HK$150.8 billion (US$19.45 billion) over the same period.

During 2014:

  • Primary market property sales soared by 52.6% y-o-y to 16,857 units, total transaction values surged by 83.7% to HK$176.16 billion (US$22.72 billion).
  • Secondary market property sales rose by 18.5% y-o-y to 46,950 units, while transaction values rose 26.7% to HK$257.26 billion (US$33.19 billion).

Interest rate hikes are likely

Hong Kong interest rates

Hong Kong’s currency has been pegged at circa HK$7.8 per U.S. dollar since October 1983, which has the result that Hong Kong’s monetary policy is largely outsourced to the U.S. Federal Reserve. When the Federal Reserve increases interest rates, Hong Kong´s interest rates will most likely increase as well.

In May 2015, the Hong Kong Monetary Authority (HKMA) best lending rate remains at 5%. It dropped from 5.25% to 5% in December 2008, when the Fed Funds rate declined from 1% to 0.13%, and has been unchanged since then. Despite this, interest rate increases is expected in the coming months, in an effort to defend the currency peg amidst surging demand for Hong Kong stocks.

Mortgage lending is rising

Mortgage loans drawn down during April 2015 skyrocketed by 29.1% to HK$20.6 billion (US$2.66 billion) compared to a year ago, according to Hong Kong Monetary Authority (HKMA).  From about 41.6% of GDP in 2003, the mortgage market contracted to just 33.8% of GDP in 2007, but by 2014 was back at 43.8% of GDP.

Hong Kong outstanding loans

In April 2015, new residential mortgage loans approved rose by 5.8% y-o-y, and the total value of residential mortgage loans outstanding rose by 10.5%.

The mortgage delinquency ratio slightly increased to 0.03% in April 2015 from 0.02% the previous year, but the rescheduled loan ratio was unchanged at 0%.

Hong Kong´s rental yields are very low

Rental yields are generally falling, for all property classes. In April 2015:

  • Property Class A (properties with an area of 40 sq. m. and below) rental yields were 2.9%, down from 3.2% a year earlier.
  • Property Class B (40 to 69.9 sq. m.) rental yields were 2.6%, down from 2.9% a year earlier.
  • Property Class C (70 to 99.9 sq. m.) rental yields were 2.6%, down from 2.7% a year earlier.
  • Property Class D (100 to 159.9 sq. m.) rental yields were 2.3%, down from 2.5% a year earlier.
  • Property Class E (160 sq. m. and above) rental yields remained steady at 2.2%.

Hong Kong rental yields

The extremely low rental yields in Hong Kong can be attributed to the surge in property prices in recent years. The house price index in Hong Kong rose by 274.2% from April 2004 to April 2015, but the rental index rose by just 122.2% over the same period.

Rents for smaller-sized residential properties rose most during the year to April 2015 - up 16.03%  for apartments smaller than 40 sq. m.. Rents for 40-69.9 sq. m. apartments rose by 8.91%. Meanwhile, rents dropped by 1% for 70-99.9 sq. m. apartments, and rose by a modest 2.4% for 100-159.9 sq. m. apartments and by 4.02% for apartments larger than 160 sq. m.

Hong Kong prices rents

AVERAGE RENTS, APRIL 2015

PROPERTY SIZE AVERAGE RENTS (HK$/sq. m) YEAR-ON-YEAR CHANGE (%)
HONG KONG KOWLOON NEW TERRITORIES HONG KONG KOWLOON NEW TERRITORIES
Less than 40 sq. m 427 334 282 16.03 13.61 19.49
40 – 69.9 sq. m 379 334 240 8.91 16.38 17.07
70 – 99.9 sq. m 398 354 243 -1.00 9.94 14.08
100 – 159.9 sq. m 427 302 247 2.40 -1.63 4.22
Greater than 160 sq. m 466 301 262 4.02 2.03 23.58
Source: Ratings and Valuation Department (RVD)

New supply is surging

Completions skyrocketed by 90.4% in 2014, to reach 15,719 units, according to the RVD. From 2007 to 2013, completions averaged 10,000 units per year, down from an average of 25,000 units from 2000 to 2006.

In 2014:

  • Class A completions rose by 51.8%, to 2,160 units.
  • Class B completions rose by 80.2%, to 8,446 units.
  • Class C completions rose by 248.6%, to 4,207 units.
  • Class D completions rose by 16.2%, to 666 units.
  • Class E completions fell by 33.9%, to 240 units.

The government is introducing measures to increase land supply. The government and the MTR Corporation – a government-linked company that is both the city’s subway operator and a major property developer – announced in June of last year the release of five new sites that could provide 2,100 apartments. Almost all land in Hong Kong is owned by the government but leased out for private use.

Hong Kong completions

Construction work started on 8,000 new homes in the first quarter of 2014, the highest level since the office began tracking the market in 2004, according to Hong Kong’s Transport and Housing Bureau (THB).  

In 2014, the total housing stock stood at 1,136,430 units, a 1.1% increase from the previous year. According to THB estimates, there will only be around 73,000 units coming on line in the next three to four years.

Hong Kong’s economic slowdown

Hong Kong gdp inflation

Hong Kong´s economic growth slowed to 2.1% in Q1 2015 from a year earlier, down from 2.4% growth in Q4 2014, mainly due to falling retail sales and weak exports.

Retail sales dropped 2.3% y-o-y in the first four months of 2015, after a small decline of 0.2% in 2014, amidst slower growth in tourist arrivals and weaker tourist spending. In fact, the drop in exports of services, which includes tourists´ contribution to the economy, lowered GDP in Q1 2015 by up to 0.2%.

Despite this, the economy is expected to grow by 2.8% this year, after 2.3% in 2014 and 2.9% in 2013, according to the International Monetary Fund (IMF).

Hong Kong’s small open economy depends largely on variables it cannot control – tourist spending, trade income, and foreign money inflows. With an average real GDP growth rate of 7.4% from 2004 to 2007, growth slowed to 2.1% in 2008, and then contracted by 2.5% in 2009. The economy bounced back strongly, with real GDP growth rates of 6.8% in 2010, and another 4.9% in 2011, but GDP growth fell sharply to 1.6% in 2012, according to the IMF.

In May 2015, nationwide inflation rate stood at 3%, from 2.8% in April, 4.5% in March, 4.6% in February and 4.1% in January 2015, according to the Census and Statistics Department. The country’s inflation rate averaged 4.5% from 2011 to 2014, in sharp contrast from an average of -0.8% from 2000 to 2007.

Given the recent energy price falls, the government recently cut its forecast for headline inflation to 3.2% from 3.5%.

The country’s jobless rate remains low. Unemployment was 3.2% in May 2015, slightly down from 3.3% by end-2014, according to the Census and Statistics Department. Hong Kong’s unemployment rate averaged 3.5% from 2010 to 2014, down from an average of 5.5% from 2000 to 2009, according to the IMF.

Wages and earnings rose further. The nominal wage index rose by 4.1% in March 2015 from the same period last year.






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