In the middle of 2018, news of property sellers “slashing” prices started surfacing. It seemed that the overheated Hong Kong property market was finally cooling down.
Is the market going to collapse in 2019, presenting opportunities to bargain-hunt?
Two key sets of statistics track Hong Kong property pricing; the index produced by the Rating & Valuation Department (Hong Kong Government), and the Centa-City Leading Index. These are compiled with actual transaction prices of pre-owned apartments in Hong Kong. Both indicate the exact same trend: Prices peaked in July 2018 and have started to decline since then. By the end of 2018, prices had fallen by 7% from July.
Anecdotal tell-tale signs abound. One is the significantly cooler market reception to large new developments, a stark contrast to merely a year ago. These are typically small apartments in New Territories that command a ridiculously high per-square-foot price, targeting first-time homeowners. We’ve seen a decline in both oversubscription rates and transaction prices since mid-2018.
The same cooling-down is happening at the top of the market. In December 2018, a house at the Mount Nicholson on the Peak sold for HK$721,882,000, 7% less than its adjacent house sold in March.
The property market is cooling off, for sure. Doomsayers warned of a gigantic bubble burst comparable to the one in 1998-2004, where prices plunged by more than 60%. At that time, the market went into a downward pricing spiral of panic-selling, where many homeowners saw the value of their property plummeting to less than what they owed the bank.
While prices will almost certainly fall, a catastrophic collapse is quite unlikely, for the following reasons.
First, the credit situation is healthier now than before. The Government first introduced a maximum mortgage limit in 1990 – at the time, 70% of the value of the property. Since 2009, the Government has implemented eight more rounds of mortgage tightening and anti-speculation measures. Currently, the maximum loan amount is 60%, with progressively lower percentages allowed for high-priced and second properties. As a result of these measures, most properties in the market are not heavily leveraged. The massive panic-selling and widespread negative equity that we saw in 1998 is unlikely to happen again today.
Second, let’s look at a fundamental factor of price determination: demand and supply. The insufficient supply of useable land in Hong Kong has been a subject of much public chagrin. The Government’s controversial proposal to reclaim 2,000 hectares off Lantau Island is still in the midst of a heated debate. There is no near-term solution at all. On the other hand, the population of Hong Kong has been increasing – up 7% from 2007, to 7.5 million in 2018*. We can expect demand for new housing to remain solid in the years to come.
In 2019, the market will almost certainly remain sluggish, with transactions declining significantly. To begin with, we have the bear stock market and the negative “wealth effect” it brings. Investors have less “pocket money” to play the property market. At the same time, Chinese capital inflow is also decreasing. Secondly, the uncertainty surrounding the Trade War will linger a while, dampening investment intent. Finally, rising interest rates will increase mortgage costs.
In view of these factors, prospective buyers and sellers will likely wait and see, reducing transactions in the market. Closing prices will probably trend lower, though the extent of the decline will vary across different properties. The prices of small apartments (under 500 sq. ft) in New Territories, which rose ferociously in the past few years, will likely be hit hardest in this wave of correction.
To Buy or Not to Buy?
If you do not own any property, and have long considered buying, the recent downturn in the market does look interesting. If you need a new home urgently because of family or personal reasons (getting married, new baby, etc.), you should be able to find good bargains. Sellers in 2019 will most likely be investors who are unloading to ease their interest burden, or homeowners who have an urgent need to cash in. You can go really aggressive in your bid.
On the other hand, if you are not in a hurry to move into a new home, do as much searching, researching, and viewing as possible in the meantime. Do your homework, draw up a potential target list, then wait for market signals at the end of 2019 to ponder your next move.
The pendulum has swung back to a buyers’ market. For now, patience is the best policy.
*Remarks: Data from Hong Kong Census and Statistics Department.
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