3 reasons why Hong Kong's home property prices won't crumble

The risk is highly unlikely.

It has been observed that by most measures, Hong Kong’s residential property market is overpriced and the possibility of a large correction is much talked about, in light of the fact that prices are already coming down.

According to a research report from JLL, since reaching all-time highs in 2013, transaction volumes have dropped to generational lows and prices have retreated by about 7% as the government’s cooling measures have started to weigh on the market.

However, unlike others in the market, JLL thinks the risk of an outright collapse in residential property prices is unlikely.

Here’s more from JLL:

Firstly, sharp corrections in Hong Kong’s residential market have historically been triggered by major external economic shocks: the US stock market crash of 1987; aggressive monetary policy tightening in China in 1994; Asia Financial Crisis in 1997; and Global Financial Crisis in 2008.

With most economists forecasting moderate global growth over the next few years, barring a substantial policy misstep in China, an economic crisis is not our baseline scenario.

Secondly, holding costs for home owners remain low. As much talk as there has been on the tapering of QE and rising interest rates in the bond markets, the reality is that mortgage rates–which are closely tied to the US Federal Funds Rate–remain at extremely low levels.

In fact the average mortgage rate in Hong Kong has actually fallen in the past 12-months as banks aggressively compete for business in an otherwise slow market.

Furthermore, low interest rates limit investment alternatives with most Hong Kong investment properties generating positive carry.

Not to mention there is plenty of debate as to how fast rates will rise and whether they will return to ‘normal’ levels at all.

Thirdly, supply remains low. While the government has been doing its best to ramp up supply, it is unlikely to get close to its annual target of 20,000 private residential units until 2016.

The lack of supply in the primary sales market limits the amount of pressure placed on vendors in the secondary market, especially with some recent launches enjoying reasonable response rates.

With government policy continuing to suppress demand, developers will need to continue to offer discounts to draw buyers into the primary sales market.

However, the lack of motivation for sellers in the secondary market to lower prices significantly is likely to lead a gradual decline in prices over a prolonged period rather than a sharp correction.

For bargain hunters, the wait may turn out being longer than they think.