17 January 2017 - 2016 bestowed Hong Kong with the dubious honour of being the least affordable housing market in the world.  A carry on from 2015, whereby according to Demographia’s International Housing Affordability Study, the median real estate prices were 19 times median annual pre-tax household income,  the Hong Kong property market was also designated within ‘bubble risk’ territory by the UBS Global Real Estate Bubble Index report in September 2016, further validating Hong Kong’s unsustainable property price to income levels. 

 

With real incomes virtually stagnating, 2016 saw the Hong Kong government enact further cooling measures which were in line with the prevailing downward price pressures brought on by weak demand and a growth in housing stock. The introduction of the Ad Valorem Stamp Duty in early November lead to an abrupt drop in demand with home sales in 35 housing estates plunging by 36.5 per cent. Looking to 2017, though Credit Suisse forecasts a 22 per cent price correction by 2018, CLSA predicts this measure will only have a temporary effect since first-time buyers are exempt and luxury properties in Hong Kong remain a comparatively safe asset class to investments in more volatile markets overseas. Ultimately Hong Kong’s property market in 2017 will be heavily influenced by a confluence of interest rate changes, government policy, housing supply and the city's overall economic health.

 

Interest Rates

 

Citing the International Monetary Fund, in referring to the recent rise of US interest rates by 25 basis points, Hong Kong’s overstretched property valuations could lead to market vulnerabilities if rates were to increase further.  Already the Fed’s decision has led to a HIBOR rate surge of 45 basis points in December.  Though banks may yet keep HIBOR-linked mortgages at artificially low rates to incentivize home ownership, existing home owners will be under increasing pressure as their monthly mortgage contributions increase. 

 

The growing costs of borrowing brought on by the interest rate hikes is predicted to negatively impact housing demand in Hong Kong and exert a downward pressure on price. Citi Bank expects a 15 per cent fall in home prices in 2017 whereas Centaline Property Agency entertains the possibility of an 80 per cent fall in transactions in January compared to November figures. 

 

Government Policy

 

The higher levy associated with the Hong Kong Government’s Stamp Duty is intended to cool the overheated housing market. Taken in tandem with the regulatory environment in Mainland China and the tighter restriction on capital outflows for its citizens, mainland driven demand is also expected to lapse. The share of mainland buyers in luxury property has already declined in due part because of the yuan’s depreciation relative to the greenback. Now subject to a 30% stamp duty as well, associated demand could yet fall further. 

 

Housing Supply

 

As a key driver within the Hong Kong property market, curbs on spending for mainland consumers also extends to Chinese developers. Highly leveraged and now faced with a higher bond selling threshold on the Shanghai Stock Exchange, according to Bloomberg, with USD 17.3 billion of developer bonds due in 2017, mainland property firms will struggle to finance their debts. This contravenes the record-breaking land purchases last year by mainland developers such as the recent HKD5.4 billion sale tender by the PRC-backed HNA Group in Kai Tak.  That being said, capital restrictions have a disproportionate effect on smaller firms.

 

The influx of mainland developers will account for up to 8 per cent of housing supply released between 2016 and 2019. Despite ebbs and flows (for which Hong Kong property is famous for), consensus points towards a positive long-term outlook for Hong Kong property prices given supply/demand imbalances in a relatively unlevered financing environment.