18th September 2023 – (Hong Kong) Hong Kong’s property market, after years of stratospheric price increases, now confronts a prolonged slump as banks hike mortgage rates. This compounds existing headwinds like a weak economy and falling mainland China prices. With higher borrowing costs set to further erode affordability, analysts forecast home prices dropping 5% or more by year’s end.

To understand where the market is headed, we must first review its past trajectory. For decades, prices marched ever upwards, especially in urban cores where sky-high valuations became normalised. Hong Kong’s stature as a global city, transport links, economic dynamism and acute land scarcity fuelled relentless appreciation.

However, the tide has definitively turned, as evidenced by the Centaline City Leading Index (CCL) breaching the 170 point support level, falling to 159.87. On a weekly basis, the index dropped 1.19%, while month-on-month it declined 1.85%. In Kowloon, prices are now at 2019 lows.

This raises the critical question: where is Hong Kong’s property market heading next? The market wields huge influence on both individual and collective financial fortunes, making its direction vitally important. Prices are shaped by multiple forces, including the economy, government policies, population growth and more.

Economically, Hong Kong’s performance directly impacts real estate. If robust growth continues and incomes rise, purchasing power increases too, potentially spurring appreciation. However, recent government interventions have prompted high net worth individuals to shift capital into other assets. If the economy sputters or high inflation emerges, prices will suffer. With no post-reopening boost and the government pushing gimmicks like “Night-time economy”, risks abound.

Government policy is another major driver of the market. Changes to regulations and lending rules can sway prices directly or indirectly. For instance, relaxing property curbs or lowering mortgage barriers could lift prices. But for the market to stabilise and transaction volumes to normalise, the government needs to remove, not add, restrictions.

Population growth also affects housing demand and prices. With extremely high density, demand keeps mounting in Hong Kong. But emigration leading to distressed sales plus new land supply means downward adjustment is inevitable.

The consensus is that prices still have further to fall, with the secondary market following the primary one down. The recommendation is for punitive measures to be scrapped and normalcy to return before foreign capital and local savings re-enter the market.

Of course, policy shifts, economic conditions, population patterns and more will significantly sway prices. When facing volatility, we must stay rational, carefully analysing the interplay of different factors.

Mortgage Rates Set to Rise Further, Weighing on Market

A key headwind is rising mortgage rates, as major lenders increase costs for new home loans. HSBC, Standard Chartered and Bank of China Hong Kong are hiking rates 50 basis points, from 3.625% to 4.125%. Hang Seng Bank and Bank of East Asia are following suit. Effective Monday, rates on new mortgages from these banks, which control 80% of the market, will be markedly higher. Citibank is implementing a similar increase Wednesday. Existing mortgages are unaffected.

Based on a typical HK$5 million mortgage over 30 years, monthly payments will rise HK$1,430 after the hike, a 6% increase. China Construction Bank Asia is boosting rates even more aggressively, by 150 basis points to 5.125%.

Already, prices fell 1.1% month-on-month in July, the steepest drop this year, per the Rating and Valuation Department. July also saw the lowest transaction volume in seven months. The hikes come just before an anticipated pause in U.S. Fed tightening as inflation improves. Hong Kong nevertheless continues matching Fed moves to maintain currency peg. Banks have lifted prime rates five times over the past year by a total of 0.875 percentage points. Major lenders now have prime at 5.875-6.125%, levels not seen since 2007.

Interbank rates continue trending up as well. One-month Hibor rose to 5% in September from 4.2% in January. Three-month Hibor hit 5%, while six-month reached 5.18%.

Further prime rate increases may materialise if interbank rates remain elevated. Markets expect at least one more Fed hike this year. This would necessitate additional lifting by Hong Kong banks.

With mortgage costs continuing to increase alongside other economic uncertainties, Hong Kong housing faces an extended downward trajectory. Only once market excesses are wrung out will stability reemerge. But that lies well into the future, given current conditions.