Market Trends

Hong Kong's Real Estate Sector Grapples with Persistent Challenges Despite Policy Easing

Hong Kong's real estate market is in the midst of a significant struggle for recovery, as the local government implements its firmest stance yet to reinvigorate the property sector. Despite measures intended to stimulate market interest such as relaxed homebuyer taxes and mortgage rules, potential buyers are exercising caution. The combination of soaring interest rates, a robust property inventory, and the city's faltering economy are contributing to their hesitation.

Analysts have weighed in on the government's efforts outlined in recent budget measures aimed at reviving the financial hub. These moves come on the heels of a plunge in home prices that reached a seven-year nadir. Political voices along with industry experts had been calling for the abolition of stamp duties, a regulatory feature installed over a decade past with the purpose of tempering demand.

Upon the announcement's release on a Wednesday, shares belonging to property developers surged, prompted by anticipations that these changes would serve as a catalyst for a rise in home sales. However, the consensus among market analysts indicates a continued suppression of property values, provided that borrowing costs stay elevated.

Analysts Offer Cautious Outlook on Hong Kong's Property Market

"The market's response to these measures exceeded expectations," stated Sam Wong, a stock market analyst at Jefferies LLC. Even so, Wong pointed out that "since interest rates are persisting at high levels, this poses a negative spread for buyers." In light of this, he projects a potential further decrease in housing prices by a small percentage or a stagnation throughout 2024.

Property investment in Hong Kong is presently a losing proposition due to the discord between mortgage rates and rental yields. The estimated yield on residential properties hovered between 2% to 2.5% in 2023, while October's average mortgage rate was significantly higher at 3.9%, according to figures from the government and mReferral Mortgage Brokerage Services.

Despite the unpromising environment for property investors, an uptick in transaction volumes is projected, as expressed by Joseph Tsang, chairman of Jones Lang LaSalle Inc. in Hong Kong. Following the recent changes, Tsang anticipates developers will push forward with new construction projects. He predicts an increase in home sales by as much as 15% in 2024, with property prices still descending, albeit at a reduced pace.

"It is going to necessitate slashed interest rates coupled with an economic upswing for property values to reach a nadir and bounce back," Tsang elaborated.

A Closer Look at Hong Kong's Revised Property Transaction Rules

Prior to the implementation of the new budget measures, non-resident property buyers were faced with a 15% tax for property acquisitions, while local buyers who already owned a property saw a 7.5% levy imposed upon them. Furthermore, sellers parting with their properties within a two-year window were also subject to additional duties. The standing rate for regular home purchases, which caps at 4.25%, remains unaltered.

In an intriguing move, the Hong Kong Monetary Authority (HKMA) took steps to relax mortgage provisions. This allows certain individuals aiming to buy homes the ability to do so with relatively lower initial payments. For properties valued up to HK$30 million (approximately $3.8 million), the maximum loan-to-value (LTV) ratio has been modified to 70%. Previously, the 70% LTV ratio was exclusively applicable to properties priced at or below the HK$15 million mark.

An additional significant policy change by the HKMA is the suspension of the stress test that previously applied to home mortgages. This test compelled borrowers to prove an income level sufficient to cover the hypothetical event of rising interest rates.

The Role of Real Estate in Hong Kong's Growth Trajectory

The thriving real estate market has long been a cornerstone of growth for Hong Kong, not only fueling government revenue and the expansion of the economy but also fostering the creation of wealth among homeowners and the city's property magnates. Since the transfer of sovereignty from Britain to China, the city's property prices have soared, driven by burgeoning capital markets that have attracted global financial players and affluent mainland purchasers.

The stamp duties came into existence in a bid to temper the surging demand for homes attributed to plummeting interest rates during the global financial crisis aftermath. However, the market's response was not as intended, as property values more than doubled from 2008 to 2013 despite these measures.

"Just as past tightening moves did not cap the ascension of housing prices, the recent easing may not be able to swiftly halt the downward trajectory," explained Eric Zhu, an economist at Bloomberg Economics.

Read more about the housing policy changes and their impact on economic growth here.

Affordable Housing Concerns in the Shadow of Market-Focused Policies

Hong Kong's explosive housing boom resulted in the city becoming one of the globe's least accessible residential markets, where steep housing expenses have spawned widespread dissatisfaction among the younger demographics of the population. This dissatisfaction contributed to the social unrest that escalated into the protests during 2019. Critics argue that the government's decision to abolish all anti-speculation taxes through the recent budget demonstrates a prioritization of market capital gains over the citizens' ability to access affordable housing.

"It's not an opportune moment to remove these measures at a time when Hong Kong's housing affordability issue is still lingering near an all-time high," voiced Brian Wong, a Liber Research Community think tank scholar. "Such actions signify the government's preference for speculative investments rather than focusing on providing its citizens with accessible housing options," he added.

The prospect of regaining the once-booming real estate market appears doubtful in the near term, despite these sacrifices in affordability. Home values are expected to stay under pressure throughout the current year, assert Patrick Wong and John Wong, analysts at Bloomberg Intelligence.

"Major developers might confront difficulties in elevating prices due to the high level of unsold new homes, the likes of which have not been observed for 20 years," they remarked.

Real Estate Outlook: A Glimmer of Hope Amidst Market Volatility

In conclusion, while the Hong Kong government's most assertive measures in recent times to rekindle real estate interest offer a glimmer of hope to some in the industry, the actual impact on market recovery remains to be seen. High interest rates, economic instability, and an abundance of inventory create an environment where not even significant policy shifts can guarantee a fast-paced revival of the once-red-hot property sector.

As developers and potential homeowners alike navigate these complex market dynamics, all eyes will be on the interplay between government policies, economic factors, and the sentiment of local and international investors. The balancing act between stimulating market growth and maintaining affordable housing will continue to challenge policymakers as they strive for economic stability in this vibrant financial hub.

Housing market shifts often signal broader changes in an economy, and Hong Kong's real estate sector will no doubt continue to serve as both a barometer and a battleground for the financial health and societal well-being of this dynamic city.

©2024 Bloomberg L.P. All rights reserved. This document was produced without the editing or control of the Bloomberg Editorial Department. Visit the Bloomberg site here for more information on how the Hong Kong real estate market and the broader economy are faring.