Hong Kong’s property market remains healthy
Lalaine C. Delmendo | April 22, 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.
|AVERAGE HOUSE PRICES, NOVEMBER 2021|
|Average prices (per sq. m)||Year-on-year change (%)|
|Property size||Hong Kong||Kowloon||New Territories||Hong Kong||Kowloon||New Territories|
|Less than 40 sq. m||185,661||23,813||160,124||20,538||153,151||19,644||-0.7||-2.9||1.6|
|40-69.9 sq. m||186,681||23,944||152,091||19,508||133,851||17,168||2.7||-2.5||-0.3|
|70-99.9 sq. m||213,881||27,433||150,409||19,292||136,869||17,555||-1.0||-12.7||5.6|
|100-159.9 sq. m||243,260||31,201||208,694||26,768||129,223||16,574||0.6||9.1||2.8|
|Greater than 160 sq. m||249,677||32,024||223,932||28,722||108,325||13,894||-5.9||23.2||17.4|
|Sources: Ratings and Valuation Department (RVD), Global Property Guide|
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.
Hong Kong property market remains the world’s most unaffordable
Housing demand in Hong Kong 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 currency peg to the dollar kept borrowing costs near record lows, fuelling continued property demand.
HOUSE PRICE INDEX, Y-O-Y CHANGE (%)
|Sources: Ratings and Valuation Department, Global Property Guide|
For the eleventh year in a row, Hong Kong’s property market is rated the world’s most unaffordable by the Demographia International Housing Affordability Survey 2021. Average home prices were 20.7 times gross annual median household income in 2021, almost at par from the past three years, but up from 19.4 times in 2017, 18.1 times in 2016, 19 times in 2015, 17 times in 2014 and 12.6 times in 2013.
Yet in Mercer’s 2021 Cost of Living Survey, Hong Kong’s rank fell one notch to become the world’s second most expensive city for expatriates to live in, next to the Ashgabat, Turkmenistan.
Hong Kong, along with Frankfurt and Toronto, also top the 2021 UBS Global Real Estate Bubble Index, with the three cities registering the most pronounced bubble risk assessments among the housing markets analyzed.
“Hong Kong is the only market in the bubble risk zone [in the Asia-Pacific]. Political tensions and economic woes ended a 15-year uptrend of prices in 2018. Yet imbalances remain highly elevated, despite three years of nearly stagnating real prices,” said the UBS report.
“Buying a 60 square meter (650 square foot) apartment exceeds the budget of people who earn the average annual income in the highly skilled service sector in most world cities. In Hong Kong, even those who earn twice the city’s average income would struggle to afford an apartment of that size,” added the UBS report.
Property sales 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.
Both primary and secondary markets experienced a strong resurgence in demand in Jan-Nov 2021:
- Primary market property sales rose by 22.2% y-o-y to 16,136 units, based on data from RVD. Likewise, total transaction values increased strongly by 45.7% to HK$ 213.7 billion (US$27.4 billion).
- Secondary market property sales rose by 30.6% to 53,016 units, and transaction values increased 37.6% to HK$ 471.7 billion (US$60.5 billion).
Residential construction activity falling
Completions fell by almost 40% y-o-y to 12,624 in 2021, in contrast to a 53% growth in 2020, according to the provisional figures released by RVD. Over the same period:
- Class A completions (properties with an area of 40 sq. m. and below) fell by 54.6% y-o-y to 4,192 units, following a 39% rise in 2020.
- Class B completions (40 to 69.9 sq. m.) dropped 20.3% y-o-y to 6,169 units, a sharp turnaround from the 85% increase in the prior year.
- Class C completions (70 to 99.9 sq. m.) fell by 30% to 1,945 units, following an 84.5% rise in 2020.
- Class D completions (100 to 159.9 sq. m.) plummeted almost 72% to 213 units, after falling by 26% in 2020.
- Class E completions (160 sq. m. and above) plunged 72.2% y-o-y to 105 units, in contrast to a 20% increase in the prior year.
The stock of flats in Hong Kong stood at 2,913,000 units in 2021, up by 7.6% from 2,707,000 units in 2016, according to the Transport and Housing Bureau.
How to solve Hong Kong’s chronic housing shortage?
Increasing supply is the key.
“We are looking at a shortfall of at least 1,200 hectares of land to meet our future supply and demand, and this is not taking into account extra land needed to improve the living space of each individual,” said Task Force on Land Supply chairman Stanley Wong Yuen-fai.
The government recently unveiled Hong Kong’s first major reclamation project since 2003, at an estimated cost of HK$20.5 billion (US$2.63 billion). Scheduled for completion by 2030, it will reclaim 130 hectares off northern Lantau and extend Tung Chung new town to provide 49,000 flats for 144,000 people, plus 870,000 sq. m. of commercial floor area.
“It will greatly help solve the current shortage of housing,” said Financial Secretary Paul Chan. Besides this, the government’s 10-year housing strategy aims to provide land for 28,000 public flats annually, alongside 18,000 private homes.
Currently, the total housing stock stood at 1,225,848 units, up 1.6% from the previous year, according to the RVD.
Several rounds of market-cooling measures
To reduce speculative buying and regulate house price growth, the government has introduced several rounds of housing market-cooling measures in recent years. But in November 2020, Chief Executive Carrie Lam Cheng Yuet-ngor’s decided to scrap the double stamp duty for commercial properties to boost small firm’s cash flows amidst the pandemic. Yet the stamp duty for residential properties remained in place.
To discourage developers from hoarding, in June 2018 Carrie Lam introduced a vacancy tax on unsold homes that are not leased, or have remained unoccupied six months after receiving an occupation permit. The tax rate is two times of the rental income, or 5% of the home’s value.
Aside from the tax, the government also allocated nine plots of land, including three in the prime Kai Tak district, for public housing.
In addition, the Hong Kong Monetary Authority (HKMA) imposed new restrictions on bank lending to property developers in May 2017, restricting loans to property developers a maximum 40% of a site’s value, replacing the earlier limit of 50%. Also, the amount of loans allowed for residential property with value less than HK$10 million was reduced from 60% to 50% and those with value exceeding HK$10 million was also cut from 50% to 40%.
Also, a 30-person Land Supply Task Force was set up to consider long-term solutions to Hong Kong’s housing crisis, given the outcry about ‘coffin homes’.
In recent years, Hong Kong’s government has leaned against property price rises:
- In November 2010, the government imposed a ‘flip tax’ of 15% on properties resold within six months (though in May 2014 the rule was somewhat relaxed), 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 imposed a 15% extra 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$254,790), though again, this measure ended in May 2014.
- In April 2013, the Residential Properties (First-hand Sales) Ordinance to shield buyers from dishonest sales practices came into full effect.
- 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.
- In November 2016, the government raised stamp duties for all property transactions to 15%, except for first time homebuyers who are charged just 4.25%. However, house price rises continued to accelerate, amidst a surge in the number of multiple home purchases on one single transaction as investors take advantage of lower tax rates.
- In an effort to close the loophole, the government also announced that first time homebuyers acquiring more than one property in a single contract will be charged the same 15% stamp duty that applies to purchases of a second property starting April 2017.
Low interest rates
The HKMA lowered its base rate by 64 basis points to 0.86% in March 2020, following a similar move made by the U.S. Fed at the onset of the COVID-19 pandemic. The base rate was kept unchanged since.
Hong Kong’s currency has been pegged at around HK$7.8 per U.S. dollar since October 1983, so when the US Federal Reserve interest rates move, so too do Hong Kong’s interest rates.
Major banks’ best lending rates are at record-low levels for Hong Kong. HSBC Holdings PLC, Bank of China (Hong Kong), and Hang Seng Bank retained their best lending rate at 5%. The best lending rate of China Citic Bank International, Standard Chartered Bank, and Bank of East Asia stands at 5.25%.
Mortgage interest rates are even lower, now currently at about 2.5%.
Fixed-rate mortgage scheme converted from pilot to permanent program
At the height of the pandemic, the Hong Kong Mortgage Corporation Limited (HKMC) introduced a pilot scheme for fixed-rate mortgages for 10, 15 and 20 years, in an effort to reduce homebuyers’ risks from interest rate volatility, thereby improving the banking sector’s long-run stability. The maximum loan amount of residential mortgage under the scheme is HK$ 10 million (US$1.28 million). At the end of the fixed-rate period, the borrower has the option to re-fix the mortgage rate or convert it to a floating-rate loan.
In October 2021, HKMC announced that the scheme will be converted from a pilot program into a permanent offering starting from November 1, 2021. Accordingly, the current fixed interest rates per annum under the scheme will be maintained until end-January 2022. Then starting from February 2022, the new rates will be announced monthly.
“Proposed in the 2020-21 Budget, the Fixed-rate Mortgage Scheme has approved loans totalling around HK$400 million in the past year and a half. This reflects a certain market demand for fixed-rate mortgage products,” said Financial Secretary Paul Chan. “The scheme has filled a market gap, and its permanent offer will continue to provide an alternative financing option to homebuyers for mitigating their risks arising from interest rate volatility, thereby enhancing banking stability in the long run.”
FIXED-RATE MORTGAGE PILOT SCHEME
|Fixed-rate Period||Gross Mortgage Rate (GMR)||Full/Partial Prepayment Penalty (% of the Prepaid Amount)|
|Fixed Interest Rate||GMR After the Fixed-rate Period|
|10-year||1.99%||The then prevailing fixed mortgage rate or Hong Kong Prime Rate minus 2.35%||1st year: 3% 2nd year: 2% 3rd year: 1%|
New mortgage lending rising strongly
New residential mortgage loans approved rose strongly by 26.7% to 10,122 in November 2021, from 7,986 in the same period last year, according to according to the Hong Kong Monetary Authority (HKMA). Likewise, the value of newly approved residential mortgage loans soared 38.1% y-o-y to HK$51.4 billion (US$6.6 billion) in November 2021.
The secondary market accounted for more than half of all new mortgage loans approved during the period. The primary market and refinancing accounted for 24% and 25%, respectively.
The value of mortgage loans outstanding increased to a record HK$ 1.72 trillion (US$220.73 billion) in November 2021, up 9.4% from a year earlier, based on figures from the HKMA.
However, the average loan-to-value (LTV) ratio of newly approved loans fell to 54.6% in November 2021, from 57.3% a year earlier.
Both the mortgage delinquency ratio and the rescheduled loan ratio were almost unchanged in November 2021, at 0.02% and 0% respectively.
Hong Kong’s rental yields remain low; rents mixed
Hong Kong’s extremely low rental yields can be attributed to the surge in property prices in recent years. Hong Kong is not a ‘typical’ market. It is a place where the rich choose to park assets in the form of apartments, as part of a diversified asset-safeguard strategy - like Monaco and Singapore. Such markets typically have lower rental yields than more ‘normal’ housing markets.
Rental yields remain very low. In November 2021:
- Property Class A (properties with an area of 40 sq. m. and below) rental yields were 2.4%, unchanged from a year ago.
- Property Class B (40 to 69.9 sq. m.) rental yields were also unchanged from a year earlier, at 2.2%.
- Property Class C (70 to 99.9 sq. m.) rental yields were 2.1%, slightly down from 2.2% a year earlier.
- Property Class D (100 to 159.9 sq. m.) rental yields were 2%, slightly down from 2.1% in November 2020.
- Property Class E (160 sq. m. and above) rental yields were 2.1%, slightly up from 2% a year earlier.
Rents vary in Hong Kong, with slightly falling rents for smaller-sized apartments and rising rents for larger-sized apartments. In November 2021:
- Rents for apartments smaller than 40 sq. m. fell slightly by 0.2% y-o-y, to an average of HK$ 430 (US$ 55) per sq. m per month.
- Rents for 40-69.9 sq. m. apartments rose by 2% y-o-y, to HK$ 399 (US$ 51) per sq. m. per month.
- Rents for 70-99.9 sq. m. apartments fell by 4.9% y-o-y, to HK$ 386 (US$ 50) per sq. m. per month.
- Rents for 100-159.9 sq. m. apartments rose by 6.1% y-o-y, to HK$ 437 (US$ 56) per sq. m. per month.
- Rents for apartments larger than 160 sq. m. rose by 5.8% y-o-y, HK$ 453 (US$58) per sq. m. per month.
AVERAGE RENTS, NOVEMBER 2021
|Average rents (per sq. m)||Year-on-year change (%)|
|Property size||Hong Kong||Kowloon||New Territories||Hong Kong||Kowloon||New Territories|
|Less than 40 sq. m||430||55||384||49||317||41||-0.2||4.3||5.3|
|40-69.9 sq. m||399||51||343||44||267||34||2.0||5.2||3.9|
|70-99.9 sq. m||386||50||346||44||263||34||-4.9||3.0||2.3|
|100-159.9 sq. m||437||56||388||50||249||32||6.1||15.5||-1.2|
|Greater than 160 sq. m||453||58||254*||33||271||35||5.8||-27.4||8.4|
|Sources: Ratings and Valuation Department (RVD), Global Property Guide * As of Oct 2021|
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.
- Property Market Statistics (Rating and Valuation Department): https://www.rvd.gov.hk/en/publications/property_market_statistics.html
- Monthly Statistical Bulletin (January 2022 - Issue No. 329) (Hong Kong Monetary Authority): https://www.hkma.gov.hk/eng/data-publications-and-research/data-and-statistics/monthly-statistical-bulletin/
- Consumer Prices (Census and Statistics Department): https://www.censtatd.gov.hk/en/scode270.html
- Demographia International Housing Affordability 2021 Edition (Demographia): http://www.demographia.com/dhi.pdf
- Mercer 2021 Cost of Living City Ranking (Mercer): https://www.mercer.com/content/dam/mercer/attachments/private/gl-2021-cost-of-living-city-ranking-mercer.pdf
- UBS Global Real Estate Bubble Index 2021 (UBS): https://www.ubs.com/global/en/wealth-management/insights/2021/global-real-estate-bubble-index.html
- Housing in Figures 2021 (Transport and Housing Bureau): https://www.thb.gov.hk/eng/psp/publications/housing/HIF2021.pdf
- Hong Kong to abolish double stamp duty on commercial property in move designed to boost small firms’ cash flows (South China Morning Post): https://www.scmp.com/business/article/3111185/hong-kong-abolish-stamp-duty-commercial-property-move-designed-boost-small
- The HKMA’s Response to US Fed’s Rate Cut (Hong Kong Monetary Authority): https://www.hkma.gov.hk/eng/news-and-media/press-releases/2020/03/20200316-4/
- Will Hong Kong banks cut prime rates below record low of 5 per cent? (South China Morning Post): https://www.scmp.com/business/banking-finance/article/3075344/will-hong-kong-banks-cut-prime-rates-below-record-low-5?module=perpetual_scroll_0&pgtype=article&campaign=3075344
- Permanent Offer of Fixed-rate Mortgage Scheme (Hong Kong Monetary Authority): https://www.hkma.gov.hk/eng/news-and-media/press-releases/2021/10/20211029-3/
- Fixed-Rate Mortgage Scheme (Hong Kong Mortgage Corporation Limited): https://www.hkmc.com.hk/eng/our_business/fixed-rate_mortgage_scheme.html
- Residential Mortgage Survey Results of Survey for November 2021 (Hong Kong Monetary Authority): https://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2021/20211231e5a1.pdf
- People’s Republic of China – Hong Kong Special Administrative Region (International Monetary Fund): https://www.imf.org/en/Countries/HKG
- Hong Kong economy to keep growing in 2022, financial chief predicts (South China Morning Post): https://www.scmp.com/news/hong-kong/hong-kong-economy/article/3161860/hong-kong-economy-keep-growing-2022-financial
- Table 6 : Labour Force, Unemployment and Underemployment (Census and Statistics Department): https://www.censtatd.gov.hk/en/web_table.html?id=6
- Hong Kong bans flights from 8 countries, tightens COVID curbs (Al Jazeera): https://www.aljazeera.com/news/2022/1/5/hong-kong-bans-flights-from-8-countries-tightens-covid-curbs
- External merchandise trade statistics for November 2021 (The Government of the Hong Kong Special Administrative Region): https://www.info.gov.hk/gia/general/202112/28/P2021122800342.htm