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Hong Kong's red-hot property market
Hong Kong's residential property price index soared 15.5% (13.6% inflation-adjusted) during the year to January 2018, up from a y-o-y increase of 11% (9.61% inflation-adjusted) during the same period last year, according to the Ratings and Valuation Department (RVD). During 2017, residential property prices increased 14.83% (12.88% inflation-adjusted), a sharp acceleration from growth of 7.86% in 2016, and 2.41% in 2015.
During the year to January 2018:
- Apartments smaller than 40 sq. m: prices surged by 13.95% to HK$170,159 (US$21,702) per sq. m.
- 40-69.9 sq. m. apartments: prices rose by 14.48% to HK$170,853 (US$21,791) per sq. m.
- 70-99.9 sq. m. apartments: prices rose by 10.6% to HK$205,418 (US$26,199) per sq. m.
- 100-159.9 sq. m. apartments: prices increased 18.9% to HK227,861 (US$29,061) per sq. m.
- Apartments with sizes bigger than 160 sq. m: prices rose by 6.67% to HK$294,342 (US$37,540) per sq. m.
Real incomes have virtually stagnated in Hong Kong for years. But house prices have tripled from 2003 to 2015.
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. The latest house price rises come despite the government raising stamp duties for all non-first time homebuyers starting November 2016 and cutting the amount of allowable loans on residential and commercial properties in May 2017.
During 2017, the total number of property transactions in Hong Kong increased 12.6% to 61,591 units from a year earlier while sales values surged 30% to HK$556.35 billion (US$71.12 billion), according to the RVD.
Residential construction activity is mixed. Completions rose by 21.9% in 2017 from a year earlier, to 17,791 units, according to the RVD. On the other hand, housing starts dropped a third to 17,000 units in 2017 from a year earlier, according to the Transport and Housing Bureau.
From 2008 to 2013, house prices skyrocketed by 134% (95.7% inflation-adjusted), driven by a flood of money in the wake of the global financial crisis.
The market slowed 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 2014, with prices rising by 13.6% in Q4 2014, 19.6% in Q1 2015, 20.4% in Q2 2015, and 15% in Q3 2015. After a brief housing market slowdown from Q4 2015 to Q3 2016 amidst Hong Kong's economic slowdown and decline in tourist arrivals, house prices recovered rapidly by end-2016. House prices have been accelerating since.
Hong Kong's currency peg to the dollar kept borrowing costs near record lows, fuelling continued property demand.
Hong Kong's property prices are expected to continue rising by double-digit figures in 2018, amidst strong domestic and foreign demand, booming stock market, record-low unemployment and strong economic growth. Jones Lang LaSalle forecasts Hong Kong home prices to surge as much as 20% this year. Another report released by Cushman & Wakefield projects a 10% growth in Hong Kong home prices.
Hong Kong's economy grew by 3.8% in 2017, sharply up from 2016's 1.9% growth and the fastest pace since 2011, amidst rising exports, strong domestic demand and rebounding tourism. The economy is expected to expand between 3% and 4% this year, according to Paul Chan, HK's finance secretary.
Rental yields in Hong Kong are very low
Hong Kong's property market is in a select band of cities where gross rental yields - the percentage return to owners on renting out their property - is only just above 2%. This is due to the continuous rise in Hong Kong's residential property prices.
Effectively, this means that landlords are unlikely to make any profit on their apartments, once empties, administration costs, cleaning and repairs, and other costs are taken into account. Or, if not nothing, then very little. Other such cities are Monaco and Taipei.
That's not to say rents are low. You will pay US$7,000 per month for a 120 square metre (sq. m.) apartment in Mid Levels. But if you want to buy it, it is likely to cost you USD 3.7 million.
Hong Kong is not a ‘typical’ market. How could it be, when Hong Kong is the 2nd most expensive city in the world in which to buy a home? It is a place where the rich choose to park assets in the form of apartments, as part of a diversified asset-safeguard strategy - like Monaco and Singapore. Such markets typically have lower rental yields than more ‘normal’ housing markets.
Round trip transaction costs are high for foreign buyers in Hong Kong (though the surcharge is unlikely to be permanent). See our Property transaction costs analysis for Hong Kong and Property transaction costs in Hong Kong, compared to the rest of Asia.
Rental income tax is in middle range in Hong Kong
Rental Income: Net property income is taxed at 15% (previously 16%). Net income is computed by deducting a standard 20% for repairs and outgoings from the assessable value (gross rent less irrecoverable rent and rates paid by owners).
Capital Gains: No capital gains tax exists in Hong Kong.
Inheritance: Inheritance tax or estate duty was abolished from 11 February 2006.
Residents: Taxation in Hong Kong is based on the territorial source principle; i.e., where the income was earned. Income derived from outside Hong Kong is not taxed in Hong Kong.
Roundtrip buying costs are high in Hong Kong
The total roundtrip transactions costs of buying and selling an apartment are high. There is a special stamp duty (SSD) at varying rates, from 5% to 20%, depending on the holding period of the residential property. Property held for longer than 36 months will not be subject to SSD. There is also buyer’s stamp duty BSD) at a flat rate of 15% on all residential properties acquired as of 27 October 2012.
Hong Kong law is pro-landlord
Landlords have an easy life in Hong Kong.
Rents: Rents can be freely negotiated in the private sector, which comprises about half of the rental market.
Tenant Security: The Landlord and Tenant (Consolidation) Ordinance 2004 removed security of tenure, i.e. domestic tenants no longer have the statutory rights to renew their tenancy at prevailing market rates.
Hong Kong’s robust economic growthHong Kong's economy grew by 3.8% in 2017, sharply up from 2016’s 1.9% growth and the fastest pace since 2011, amidst rising exports, strong domestic demand and rebounding tourism.
Merchandise exports increased 18.1% from a year earlier in January 2018, after a y-o-y rise of 6% in December 2017, while merchandise imports also rose by 23.8% after registering an annual growth of 9% in December 2017.
Tourism is now recovering. Visitor arrivals were up 3.2% to 58.47 million people in 2017 from a year earlier, after y-o-y declines of 2.5% in 2015 and 4.5% in 2016, according to the Tourism Board. Mainland Chinese, who accounted for about 76% of arrivals in Hong Kong, increased 3.9% y-o-y to 44.45 million people.
The economy is expected to expand between 3% and 4% this year, according to Paul Chan, HK’s finance secretary.
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 4.8% in 2011, according to the IMF. The economy then grew by an average of 2.4% annually from 2012 to 2016.
In January 2018, inflation was 1.7%, up from 1.3% in the same period last year, according to the Census and Statistics Department. Hong Kong's inflation rate averaged 3.7% from 2011 to 2017.
HK’s headline inflation rate is projected to rise to 2.2% this year, according to finance secretary Chan.
Hong Kong's jobless rate remains low. Unemployment was 2.9% in Q4 2017, down from 3.3% in the same period last year, according to the Census and Statistics Department. Hong Kong’s unemployment rate averaged 3.4% from 2010 to 2017, down from an average of 5.5% from 2000 to 2009, according to the IMF.