20 June 2019
Hong Kong, the world's most overvalued housing market, saw home prices post their first dip in 29 months in August. Photo: HKEJ
Hong Kong, the world's most overvalued housing market, saw home prices post their first dip in 29 months in August. Photo: HKEJ

How far will Hong Kong housing prices fall?

Two months ago, I presented several indicators that Hong Kong’s housing market is weakening, and that the secondary housing market is heading toward a prolonged correction.

Official data shows that the city’s private housing price index has ended a rally that lasted for 28 straight months, slipping by 0.08 percent in August. The monthly decline is mild but it could be seen as a signal that housing prices are entering a downturn in the cycle.

The question on the minds of many homebuyers is this: how far can secondary housing prices fall as the market is heading toward a correction or even a downturn?

Several investment banks and sector analysts have provided forecasts of the housing market correction. Some predicted a single-digit drop, while others foresee a crash of over 40 percent. It’s very hard to predict the potential downside, given that the raging trade war between China and the United States is so unpredictable.

As of Oct. 14, the ratio of the city’s 128 housing estates with current price above the 10-week average has tumbled to 36.7 percent. That means more than half of the estates have seen the current price below the 10-week average.

If the ratio drops below 40 percent, that would confirm that the housing market is heading toward a correction. There are two forms of correction. One is a modest decline stretching over a long period, like the one seen between early 2013 and mid-2014 and between mid-2005 and early 2007. The other correction is much more dramatic, such as the one in 2008 and another in 1997 and 1998.

The unit price advance/decline diffusion index of 128 housing estates over the last three months shows that the housing price is consolidating if the index drops below 50. Historical data shows that it’s a leading indicator. The gauge has already tumbled below 50 three weeks ago, which means the housing market has officially entered a correction.

Historical data shows whenever the advance/decline diffusion index breaks below 50, the housing price would give up all gains on a year-on-year basis. That means the secondary housing price may drop 14 percent or more from its level last year.

Actual transactions in the housing market are quite thin while secondary housing prices have spiked. That means the strong price rally lacks support from strong trade. In that case, the market will become very vulnerable when the price heads south.

The housing market is likely to see a drop of 11 to 21 percent if the majority of transactions return to the normal level.

All in all, various indicators show that the city’s housing price may slump by 15 to 20 percent. And the downside could be even greater if US-China trade war escalates further.

In addition, the starter-home flats or those with small lump sums will see bigger declines, given that these homes have posted excessive price increases in recent years.

This article appeared in the Hong Kong Economic Journal on Oct 25

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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