Hong Kong's property market remains resilient, but uncertainty persists
Lalaine C. Delmendo | February 18, 2020
Now, despite market-cooling measures, the impact of continuing violent protests, the US-China trade war and the coronavirus outbreak, Hong Kong's housing market remains resilient.
Hong Kong's residential property price index rose by 5.31% during 2019, a sharp improvement from the prior year's 1.9% growth, according to the Ratings and Valuation Department (RVD). When adjusted for inflation, residential property prices increased 2.38% y-o-y in 2019. During the latest quarter, prices fell slightly by0.76% (-1.21% inflation-adjusted) in Q4 2019.
Prices of dwellings continue to rise, except for largest-sized, apartments, whose prices have been falling sharply in Kowloon and New Territories.
- Apartments smaller than 40 sq. m: prices rose by 1.74% y-o-yin 2019, to an average of HK$ 183,550 (US$23,634) per sq. m.
- 40-69.9 sq. m. apartments: prices rose by 4% y-o-y to HK$183,381 (US$ 23,612) per sq. m.
- 70-99.9 sq. m. apartments: prices increased 1.04% y-o-y to HK$ 212,776 (US$ 27,397) per sq. m.
- 100-159.9 sq. m. apartments: prices rose strongly by 6.58% y-o-y to HK 247,300 (US$ 31,843) per sq. m.
- Apartments with sizes bigger than 160 sq. m: prices fell slightly by 1.07% y-o-y to HK$ 283,311 (US$ 36,479) per sq. m. during 2019
During 2019, property transactions in Hong Kong rose slightly by0.6% to 57,606 units from a year earlier, according to the RVD.
Construction, however,is plunging. In 2019, completions fell sharply by 35% to 13,643 units from the previous year, after y-o-y rises of 18% in 2018, 22% in 2017 and 29% 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. But surprisingly, house prices bounced back at the end of 2019.
This is puzzling because Hong Kong's economy is suffering, having contracted by 1.2% in 2019 – the first annual decline since 2009. Economic forecasts for 2020 vary from growth of 0.5% to 1%, to a huge contraction of 5.8%.
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 is strugglingAfter months of violent protests, real GDP declined by 1.2% in 2019 - the first annual decline since 2009. Now the coronavirus outbreak threatens to make things worse. In an effort to contain the contagion, retail stores, theme parks and other hotspots have closed and the government decided to restrict cross-border mobility, cancelled school for weeks, ordered civil servants to work from home and urged private companies to do the same.
“The US-China phase one trade deal and growth stabilization in China should have been positive for Hong Kong’s near-term economic outlook,” said Tommy Wu of Oxford Economics. “But it has been overshadowed by the coronavirus outbreak.”
For 2020 the Economist Intelligence Unit forecasts about 0.5% to 1% GDP growth, but Dutch bank ING expects the economy to contract by a huge 5.8%.
Hong Kong’s exports contracted by 4% y-o-y in 2019 and are expected to decline further by 2% this year, based on government estimates.
Tourism is plummeting. Visitor arrivals fell sharply by 14.2% to 55.9 million people in 2019 from a year earlier, in stark contrast to a y-o-y growth of 11.4% in 2018, mainly due to the ongoing social unrest, according to the Hong Kong Tourism Board. Mainland Chinese, who usually account for about three-fourths of annual arrivals in Hong Kong, fell by 14.2% y-o-y in 2019.
In December 2019, inflation was 2.9%, up from 2.5% in the same period last year, according to the Census and Statistics Department. Hong Kong’s inflation rate averaged 3.4% from 2011 to 2018.
While Hong Kong’s jobless rate remains low, it is rising. Unemployment was 3.3% in Q4 2019, up from the previous year’s 2.8%, according to the Census and Statistics Department. Hong Kong’s unemployment rate averaged 3.4% from 2010 to 2018, according to the IMF.