Can the housing market's revival continue?

Hong Kong's home prices rebounded in 1H with the easing of COVID-19. Experts are bullish about the market's prospects, but say a revival will depend on how the inhibiting factors play out in the next few months. Oswald Chan and Zeng Xinlan report from Hong Kong.

Hong Kong's home prices have been traditionally resilient even in times of crises, and have remained so despite the coronavirus outbreak that pushed the city's jobless rate to a 17-year high amid economic recession.

While some experts believe the momentum will continue, others warn that mitigating factors could yet have an adverse effect on the market.

Residential property prices have resumed their upward trajectory since the start of 2021, with the price index of private domestic units tracked by the Rating and Valuation Department hitting a two-year high of 394.5 by late June — a cumulative rise of 3.8 percent from December. Current home prices are just 0.6 percent below the record highs of May 2019.

Property transactions have been robust, registering 50,336 sales and purchases of building units involving HK$474.44 billion (US$61.04 billion) in the first half of this year, representing an annual growth of 53.7 percent and 76.4 percent respectively, according to the Land Registry.

Last month, the Land Registry recorded 9,957 sale and purchase agreements for building units, up 6.1 percent from June and 31.4 percent higher year-on-year. The total consideration for such agreements rose 1.5 percent from June to HK$94 billion in July, representing a 35.6 percent year-on-year increase.

The number of property sales in the secondary market in the first five months of this year surged 63 percent year-on-year, while the price index of pre-owned homes smaller than 431 square feet (40 square meters) tracked by the RVD rose at a cumulative rate of 4.09 percent.

Positive factors

Market pundits said the property sector's rebound has been fueled by a host of positive factors — buoyant sentiment amid pent-up demand, the pandemic being gradually brought under control, low interest rates, and emerging signs of an overall economic recovery.

"We have seen local market sentiment improve a lot," said Keith Chan, director and head of research at Cushman and Wakefield, a global commercial real estate services firm. "This is backed by a better-than-expected economic recovery and local COVID-19 cases stabilizing."

He expects home prices to rise by a further 5 to 10 percent in the second half of this year, reaching 10 percent for the whole year.

Derek Chan, head of research at Ricacorp Properties, also expressed optimism. "We are bullish about Hong Kong's home market, assuming there would not be another major COVID-19 outbreak. If prices could go up by 5 percent in the second half of this year, the rate of price growth could be between 13 and 15 percent for the whole of 2021, assuming that travel between Hong Kong and the Chinese mainland could resume once the pandemic is contained," he said.

The special administrative region's economy has shown signs of picking up, expanding by 7.5 percent year-on-year in the second quarter of this year, compared with the increase of 8 percent in the first quarter, and reversing a contraction of six consecutive quarters. The labor market is also on the mend, with the latest unemployment rate slipping to 5.5 percent. A buoyant economy with fewer people out of work makes homebuyers more optimistic about purchasing properties for self-use or investment purpose.

Midland Realty expects Hong Kong's ultra-low interest rates to remain until at least 2024, backing the upward market trend. The United States Federal Reserve decided to stay the course at its meeting last month, keeping the federal funds rate at just zero to 0.25 percent and continuing to print money and buy US$120 billion worth of bonds monthly.

Potential risks

Lower US interest rates allow Hong Kong banks to charge lower mortgage loan rates for homebuyers, boosting home ownership.

"The actual mortgage rate will be just about 1.4 to 1.5 percent, which is very attractive," said Martin Wong, director and head of research and consultancy for Greater China at global real estate consultancy Knight Frank. Home prices could climb by 5 percent this year as people find the market appealing, he said.

In 2019, the Hong Kong government eased the cap on the loan-to-value ratio to as high as 90 percent for apartments valued at HK$8 million or less, and to 80 percent for those valued under HK$10 million, making such properties attractive to most first-time homebuyers.

"We have seen active transactions in the secondary market, mainly because homebuyers can get more-affordable mortgages," Wong told China Daily. Properties, especially those valued at less than HK$10 million, will continue to benefit from current mortgage rates that allow buyers to borrow up to 80 percent of the price of a property from a bank.

"This will continue to encourage more people to get onto the property ladder," Wong said. He sees the current active secondary-home market persisting in the second half of this year, accounting for up to 75 percent of total home transactions, with an estimated 62,000 to 65,000 units.

A limited residential apartment supply also is contributing to the sizzling local property market. From 2011 to 2020, an average of only 14,300 residential units was put onto the local market, compared with the annual average supply of 26,600 apartments between 1991 and 2000, according to official statistics. Cushman and Wakefield forecasts about 19,100 new private housing units will come on stream this year and in 2022.

According to the Transport and Housing Bureau, 20,900 private residential apartments were completed last year — a 53.67-percent increase compared with those in 2019. As of end-June, 9,000 private residential apartments were built, and about 96,000 private residential units may be available in the next three to four years.

"Should Hong Kong-mainland travel resume gradually, the economic growth outlook may further improve, boosting local investment sentiment, while the return of foreign investors may provide a fresh impetus for the buoyant housing market," said OCBC Wing Hang Bank Economist Li Ruofan. "We expect home prices to grow by 5 percent year-on-year by the end of this year."

However, Li has reservations, warning that various factors may still adversely affect market sentiment. "We should continue to be wary of the potential risks that prevent home prices from going up. The negative factors include selling pressure from people who are emigrating; an increase in new home supply in the second half of this year, which is expected to exceed 15,000 units; and the US Federal Reserve's premature tightening of monetary policies," she said.

Joseph Tsang, chairman of Jones Lang LaSalle in Hong Kong, also sounded a cautionary note. "Low interest rates and a better-than-expected economic recovery will continue to support housing demand. However, the global economy continues to be affected by the pandemic, and the flow of mainland capital to Hong Kong's property market will remain restricted by the ongoing travel curbs," he said, adding that the value of mass and luxury residential properties to rise by between zero and 5 percent in the second half of this year.