HK home prices at risk of steep correction

August 16, 2019 12:01
A slowing economy and social disturbances have exposed Hong Kong's property market to the risk of a significant downturn. Photo: Reuters

The social unrest in Hong Kong, which began more than two months ago in the wake of a government bid to amend the extradition law, is beginning to cast a shadow on the city's housing market.

Historical experience over the last four decades showed that political turmoil usually won’t inflict a sustained and huge shock to home prices, unless it triggers long-lasting fallout such as a migration wave.

It remains unclear if the current unrest would develop into long-term conflicts and prompt a large number of Hongkongers to leave and move their wealth elsewhere, like what we have seen in the 80s.

A slowing economy is also set to put pressure on property prices.

Amid the US-China trade war, Hong Kong’s GDP growth has already eased to 0.6 percent in the second quarter, the lowest level in a decade. That’s compared to 4.6 percent growth in first quarter last year, when trade war was yet to break out.

Tourist arrivals to Hong Kong, in particular from the biggest source -- mainland China, are set to decline following the recent string of protests.

The retail industry could be at risk, eventually hurting local consumption and the overall economy.

Housing prices are closely tied to economic growth. Historical data shows home prices usually posted steep declines before and during sharp economic contraction.

Despite occasional divergence, housing prices typically move in tandem with the stock market. Given this, the recent weakness of the equity market does not bode well for property prices.

Still, the city’s secondary housing price index has yet to show any notable decline.

But some indicators, such as market breadth, are flagging a consolidation.

The proportion of the city's 128 housing estates with current average home price above the 10-week average has begun to retreat from nearly 90 percent in middle of May. The metric touched 50 percent in July.

Investors should not underestimate the chance of seeing a deep and sustained housing price correction, especially if the social unrest gets worse and triggers flight of capital and people.

This article appeared in the Hong Kong Economic Journal on Aug 15

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal chief economist and strategist