Date
23 July 2017
If the housing market follows an L-shaped trajectory in the short and medium term, it would benefit all stakeholders. Such a trend would avoid the negative wealth effect of plunging home prices. Photo: HKEJ
If the housing market follows an L-shaped trajectory in the short and medium term, it would benefit all stakeholders. Such a trend would avoid the negative wealth effect of plunging home prices. Photo: HKEJ

Why Hong Kong housing prices are holding firm

Financial markets have been battered by Brexit but Hong Kong’s housing market appears fairly resilient.

The Centa-City Leading Index (CCL) has been rising in the past five weeks and is only 12 percent off last year’s peak.

We saw some big transactions last week.

Homebuyers are disappointed while property owners are scratching their heads trying to get a clear picture of the housing market.

Hong Kong’s housing market is in the middle of an L-shaped consolidation which benefits all.

It’s a surprising development given that developers, investors and analysts were all bearish on the housing market at the start of the year.

They forecast a drop of up to 30 percent in home prices for the year — or at least a 10 percent fall.

CCL, a weekly index based on current contract prices in Centaline Property Agency Ltd., has fallen just 3.7 percent this year.

Private home prices edged up in April and May, about 1.25 percent lower than at the start of the year, Rating and Valuation Department data shows.

The private rent index, a leading indicator, also shot up in May, leaving it just 2.8 percent off the pace this year.

Undoubtedly, housing prices in Hong Kong are exorbitantly high.

The median price of a flat is HK$5.56 million (US$716,661), equivalent to 19 times the average annual household income of HK$293,000.

But market fundamentals support these hefty prices.

The ratio of idle housing has been falling for five straight years to a 25-year low of 3.7 percent in the first quarter.

That shows the housing market continues to benefit from years of land supply shortage.

The government has been tightening its safeguards against property speculation since 2010.

The Hong Kong Monetary Authority has had seven rounds of mortgage tightening.

As a result, the housing market has seen an increase in end-users and long-term investors and there is yet no sign of a bubble.

Hong Kong’s 1.88 million private homeowners are in no hurry to sell. Most of them had bought their flat before the market took off.

Those who bought recently have passed a stringent stress test which means they don’t have any problem paying mortgage.

Mortgage rates have been unchanged in recent years and are widely expected to hold steady in the next two to three years.

Up to 60 percent of 1.23 million end-users have already paid off their mortgage and are in no hurry to sell.

Property investors might have few choices where to park their money amid market volatility.

That said, housing prices are unlikely to crash unless there is substantial new supply or a significant rate hike in the US or the economy deteriorates considerably.

A large number of new home supply is expected to come on stream in 2017 and 2018.

Meanwhile, there is limited scope for an aggressive US rate hike the Brexit vote. That leaves a worsening economy as the biggest risk.

If the housing market follows an L-shaped trajectory in the short and medium term, it would benefit all stakeholders.

Such a trend would avoid the negative wealth effect of plunging home prices, which would in turn drag economic growth.

That gives the government enough time to steadily increase supply.

This article appeared in the Hong Kong Economic Journal on July 4.

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

JZ/DY/RA

Hong Kong Economic Journal columnist

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