28 October 2016
Housing prices will fall about 13 percent if rents drop 10 percent. Photo: HKEJ
Housing prices will fall about 13 percent if rents drop 10 percent. Photo: HKEJ

Hong Kong property prices could tumble 15% next year

Hong Kong’s housing market has run out of steam since September and started to shown signs of easing in recent months.

That echoes my projections late last year that the city’s home prices would start to ease late this year.

Many analysts have attributed the weakening property prices to expectations of US interest rate hikes.

However, I’ve noted before that the liftoff by the US Federal Reserve won’t be the trigger for a property correction, since the rate hikes will be very modest and gradual.

Instead, the financial turmoil the rate hikes will cause, in particular the one-way appreciation of the US dollar, is more worrying.

It seems that Hong Kong’s secondary housing market has already started to weaken.

The Centa-City Leading Index began to ease in mid-September and has already declined 3.9 percent from its peak.

However, the city’s housing prices have still risen 6.6 percent so far this year.

The super-strong US dollar is a potential threat for the housing market, while falling rents will likely be the trigger for a decline.

Simply speaking, Hong Kong’s housing prices move in the opposite direction to the US dollar, albeit with a time lag of about 18 months.

The historical correlation coefficient between the greenback and the city’s housing prices is about -0.51.

Because of the peg between the two currencies, a rising US dollar makes Hong Kong dollar-denominated assets more expensive and hence suppresses demand for them.

Also, interest rates usually move up with a strong Hong Kong dollar, which weighs on housing prices.

The continued strength of the US dollar has put pressure on commodity prices and some emerging economies.

That accelerates capital outflows from emerging markets and, in turn, increases market volatility.

A stock market rout will also affect the housing market.

The US dollar index started to rally in mid-2014, and it makes sense that Hong Kong’s housing prices have started to feel pressure after a time lag of nearly 18 months.

The greenback could extend its rally given that European and Japanese central banks are set to expand their monetary easing programs.

The effects could be felt in the Hong Kong property market until 2017.

Regression analysis shows that if the US dollar index gains 1 percent, Hong Kong housing prices fall 0.85 percent.

Hong Kong’s housing market could undergo a 20 percent correction in the next nine months to reflect the 25 percent rally of the US dollar since mid-2014.

However, the US dollar weakened somewhat in the first three quarters of this year, reducing its total gain to about 17 percent.

The housing price correction in Hong Kong could therefore be closer to 15 percent.

Home rents in the city’s 100 largest private housing estates fell 1.8 percent on average to HK$33.40 per square foot last month, the biggest monthly drop in four years, ending a four-month rally.

Transactions will decrease in the secondary market as investors shift to new homes amid cooling market sentiment.

It will be difficult to offload flats in the secondary market unless the sellers offer big discounts.

However, there won’t be massive dumping of flats given that the city’s housing market has achieved substantial gains over the last seven years and that the holding cost is quite low at current interest rates.

Many property owners will choose to rent out their properties instead of selling.

Increasing market supply of flats will weigh on rents, which are set to fall further in coming months.

Rents have a correlation coefficient of 0.95 with housing prices over the last 35 years.

Both usually move in the same direction most of the time.

Historical data shows that housing prices drop 1.3 percent when rents fall 1 percent.

So, housing prices are likely to slide 13 percent if rents are expected to drop a further 10 percent next year.

This article appeared in the Hong Kong Economic Journal on Nov. 26.

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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