24 October 2016
Weak sentiment in new home market is set to ripple into the secondary market in Hong Kong. Photo: Bloomberg
Weak sentiment in new home market is set to ripple into the secondary market in Hong Kong. Photo: Bloomberg

Why secondary home prices will trend down in HK

I’ve said before that several gauges were pointing to a peak-out of Hong Kong’s housing market in the latter part of this year. Meanwhile, factors such as stock market correction and expectations for US rate hike have all come true.

Let’s review the situation again as the US tightening is getting closer, and since we are less than half a month away from the fourth quarter.

As we noted last month, the Fed liftoff won’t be the direct trigger for housing price correction. Instead, the real mortgage rate after deducting the inflation rate is a more decisive factor. Global economies are already facing disinflation or deflation as a result of Fed tapering since last year.

Meanwhile, the consumer price index in Hong Kong also tumbled to a three-year low of 2.5 percent, from a peak of 6.6 percent in the third quarter of 2014. As a result, the real mortgage rate has returned to zero in July from negative 4.2 percent.

The real mortgage rate still has further upside given that the inflation may slip further amid further US dollar strength due to the Fed liftoff. That would weigh on housing prices.

Also, the US dollar index usually moves in opposite direction with the housing price, but the latter has a time lag of around one-and-a-half years from the former. The US dollar has started to gather momentum since mid-2014. That’s why we expected housing prices to face correction in late 2015.

The greenback won’t change its upward path in the short term, given the monetary easing measures in eurozone and Japan. The Fed liftoff would only add more fuel to the US dollar, and in turn exert downward pressure on Hong Kong housing prices.

Honestly speaking, the current housing price index has yet to reflect any correction, as the index is centered on the secondary market.

Paul Chan Mo-po, the Secretary for Development, also admitted in a recent blog post that the widely-used housing price indices only reflected the secondary market, rather than the situation in the primary market.

We can sense that new home prices are already falling back as indicated by the price premium between primary and secondary markets, as well as the rise in cases where buyers are withdrawing after paying a deposit.

The weak sentiment in new home market is set to ripple into the secondary market, given that new homes already accounted for nearly 40 percent of all residential housing transactions in last year.

The new home transaction growth has kept moderating since late 2014, and eased to 3 percent in August. And the indicator usually has strong correlation with the secondary market.

All in all, various gauges show that secondary housing prices are likely to level off soon, and trend downward gradually.

The extent of the downside will depend on many factors, including Fed moves and the economic situation in China.

New home transactions data suggests that housing prices may see a drop of 10 to 15 percent in the short term. The correction will be even deeper in some starter-home projects.

This article appeared in the Hong Kong Economic Journal on Sept. 17.

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal chief economist and strategist

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