Property transactions rose by 28.5%
Lalaine C. Delmendo | February 01, 2022
Over the past thirteen years, Hong Kong's residential property prices have skyrocketed by 275% (165% inflation-adjusted), including spectacular growth of 28.5% in 2009, 21% in 2010, 25.7% in 2012, 13.6% in 2014, and 14.7% in 2017. In contrast, real incomes have virtually stagnated in Hong Kong for years.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 three years.
Hong Kong's residential property price index rose by a modest 2.85% y-o-y in November 2021, following a minuscule annual increase of 0.2% during 2020, according to the Ratings and Valuation Department (RVD). When adjusted for inflation, residential property prices increased by a minuscule 0.95% over the same period.
Variations in price movements per property size and region.
- Apartments smaller than 40 sq. m: prices fell slightly by 0.7% y-o-y in November 2021, to an average of HK$ 185,661 (US$ 23,813) per sq. m.
- 40-69.9 sq. m. apartments: prices rose by 2.7% y-o-y to HK$ 186,681 (US$ 23,944) per sq. m.
- 70-99.9 sq. m. apartments: prices dropped 1% y-o-y to HK$ 213,881 (US$ 27,433) per sq. m.
- 100-159.9 sq. m. apartments: prices rose by a minuscule 0.6% y-o-y to HK 243,260 (US$ 31,201) per sq. m.
- Apartments with sizes bigger than 160 sq. m: prices fell by 5.9% y-o-y to HK$ 249,677 (US$ 32,024) per sq. m. in November 2021
Despite the stagnant prices, demand is surging. In the first eleven months of 2021, the number of property transactions in Hong Kong rose by 28.5% y-o-y to 69,152 units, while sales values soared 40% to HK$ 685.4 billion (US$ 87.9 billion), according to the RVD.
Construction, however, remains weak. Completions fell by almost 40% y-o-y to 12,624 in 2021, in contrast to a 53.1% growth in 2020, according to the provisional figures released by RVD.
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 in 2020 due to pandemic-related travel restrictions and lockdown measures imposed worldwide.
Like the housing market, Hong Kong's overall 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 1.7% in 2019.
With the gradual reopening on the economy, HK's economy bounced back strongly in 2021, with its real GDP growing by about 6.4, according to Financial Secretary Paul Chan. However the outlook is again clouded by the imposition of new restrictions in response to the Omicron outbreak. The economy is projected to continue growing in 2022, but the pace of expansion will largely depend on Omicron, inflation, and geopolitical concerns, said Chan.
Analysis
of Hong Kong Residential Property Market »
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 grew strongly in 2021, but outlook remains uncertain
Hong Kong’s economy bounced back strongly in 2021, with its real GDP growing by about 6.4%, thanks to the gradual reopening of the economy, according to Financial Secretary Paul Chan. However the outlook is again clouded by the imposition of new restrictions in response to the Omicron outbreak.After detecting cases of the Omicron variant in January 2021, Chief Executive Carrie Lim immediately imposed a two-week ban on incoming flights from eight countries, including Australia, Canada, France, India, Pakistan, the Philippines, the United Kingdom, and the United States.
Despite this, the economy is projected to continue growing in 2022, but the pace of expansion will largely depend on Omicron, inflation, and geopolitical concerns, said Chan.
“If there is no visible deterioration of the external environment and the local epidemic situation can remain stabilised, Hong Kong’s economy can continue in a growth orbit in 2022,” noted Chan. “But the breadth, depth and speed of recovery will still be full of uncertainties.”
The HK 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 1.7% in 2019. 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.
The HK economy grew by an annual average of 3.8% from 2000 to 2018.
Yet tourism remains depressed. From January to November 2021, there were just 72,458 visitor arrivals in Hong Kong – almost nonexistent when compared to an annual average of about 56 million arrivals from 2011 to 2019. During 2020, arrivals totaled almost 3.6 million.
Hong Kong’s exports rose by 26.5% y-o-y in the first eleven months of 2021, and imports increased 24.9%. Concurrently, a trade deficit of HK$ 313.4 billion (US$ 40.22 billion), equivalent to 6.5% of the value of imports of goods, was recorded in the first eleven months of 2021.
In November 2021, inflation edged up to 1.8%, sharply up from -0.3% 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 before slowing sharply to 0.25% in 2020.
Unemployment is now falling again. In the three months to November 2021, the seasonally-adjusted unemployment rate fell to 4.1%, the lowest level since the start of the pandemic, according to figures from the Census and Statistics Department.