Remains the world's most unaffordable
Lalaine C. Delmendo | April 02, 2021
However, due to the combined impact of market-cooling measures, violent protests, the US-China trade war and the ongoing COVID-19 pandemic, Hong Kong's housing market has stabilized over the past two years.
Hong Kong's residential property price index was unchanged in 2020 from a year earlier, following a 5.5% increase in 2019, according to the Ratings and Valuation Department (RVD). When adjusted for inflation, residential property prices increased by a minuscule 0.66% y-o-y in 2020. During the latest quarter, prices fell by 1% (-3.05% inflation-adjusted) in Q4 2020.
Surprisingly, larger-sized apartments are more resilient, registering strong price increases during 2020, as compared to smaller-sized apartments which saw falling prices.
- Apartments smaller than 40 sq. m: prices fell by 1% y-o-y in 2020, to an average of HK$ 181,273 (US$ 23,385) per sq. m.
- 40-69.9 sq. m. apartments: prices fell by 2.1% y-o-y to HK$ 181,734 (US$ 23,444) per sq. m.
- 70-99.9 sq. m. apartments: prices dropped 8.9% y-o-y to HK$ 197,941 (US$ 25,535) per sq. m.
- 100-159.9 sq. m. apartments: prices rose strongly by 9.1% y-o-y to HK 247,681 (US$ 31,952) per sq. m.
- Apartments with sizes bigger than 160 sq. m: prices soared by 16.7% y-o-y to HK$ 272,580 (US$ 35,164) per sq. m. during 2020
Demand continues to fall. In the first eleven months of 2020, the number of property transactions in Hong Kong fell by 4.9% y-o-y to 53,813 units, while sales values dropped 5.4% to HK$489.49 billion (US$63.15 billion), according to the RVD.
Construction, however, is rising. Completions surged 32.9% to 18,077 in 2020 from a year earlier, following a y-o-y decline of 35.1% in 2019 and annual rises of 17.9% in 2018, 21.9% in 2017, and 29.4% in 2016.
From 2008 to 2013, Hong Kong dwelling 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, but bounced back in the second half, 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, house prices surged again by 41.5% (35.5% inflation-adjusted) from H2 2016 to H1 2018.
The housing market slowed from end of 2018 until the first half of 2019 due to macro uncertainties and social unrest. After a short-lived recovery in the second half of 2019, the housing market struggled again last year due to pandemic-related travel restrictions and lockdown measures imposed worldwide.
Hong Kong's economy contracted by about 6.1% in 2020 from a year earlier, following a decline of 1.2% in 2019, according to government estimates. The Hong Kong economy grew by an annual average of 3.8% from 2000 to 2018. The International Monetary Fund (IMF) expects economy to grow by 3.7% this year and by another 3.4% in 2022.
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.
HK’s economy continues to struggle; unemployment risingHong Kong’s economy suffered greatly for most of 2019 from social unrest as well as the US-China trade tensions, and for the whole year of 2020 from the COVID-19 pandemic. In 2020, real GDP contracted by about 6.1% from a year earlier, following a decline of 1.2% in 2019, according to government estimates.
The HK economy grew by an annual average of 3.8% from 2000 to 2018.
The International Monetary Fund (IMF) expects HK economy to grow by 3.7% this year and by another 3.4% in 2022.
When the first COVID-19 case was detected in January 2020, the HK government immediately rolled out social distancing measures and travel restrictions, putting further strain to the already ailing economy.
As a result, tourism plummeted. Visitor arrivals fell sharply by nearly 94% y-o-y in 2020 to just 3.57 million people, according to the Hong Kong Tourism Board, from 55.9 million people welcomed in 2019 – a year when arrivals have already dropped due to social unrest during the period. It was the lowest number of visitors in 36 years.
In addition, Hong Kong’s exports fell by 1.5% y-o-y in 2020 while imports dropped 3.3%. A trade deficit of HK$ 342.2 billion (US$ 44.14 billion) was recorded last year.
In December 2020, inflation was -0.7%, sharply down from 2.9% in the same period last year, according to the Census and Statistics Department. Hong Kong’s inflation rate averaged 3.3% from 2010 to 2019.
Unemployment is rising rapidly. In Q4 2020, the seasonally-adjusted unemployment rate surged to 6.6%, up from 6.3% in the previous quarter and 3.3% in Q4 2019, according to Census and Statistics Department, as a new wave of COVID-19 cases halted a wide range of economic activities. In fact, it was the highest since Q4 2004 when jobless rate also hit 6.6%.
“As the fourth wave of local epidemic continues to weigh on local consumption sentiment and disrupt economic activities, the labour market will remain under notable pressure in the near term,” said Labour Secretary Law Chi-kwong.