Here's why home prices in Hong Kong are creeping up again

It rose 1.38% in four weeks.

According to DBS, while residential property prices are still 2.8% below the peak recorded in mid-March due to government intervention, prices are creeping up again since mid-May (1.38% cumulative increase over four weeks). 

DBS noted that the most fundamental reason is the demand-supply imbalance. One can infer from the quick price ascent in recent years that the imbalance was quite huge. Even discounting investment demand, pent-up demand from end-users is enormous.

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Rents have held up even as property prices corrected somewhat. Private residentialrentsfell very mildly (HK$22.8/sqftin April versus $22.9/sqft in March; 0.4% drop) after rising for 12 months straight, but still are still up 16.9% YoY.

That’s because government controls on the property market have inadvertently stirred interest in the rental market, as potential buyers “wait-and-see”. Now, as property prices head north once more,rents are likely to move in the same direction,too.

Commercial rents (shopping centers and the like) continue to inflate quickly and extra costs are being passed on to consumers. Since 2004 (the Individual Visits Scheme wasintroduced in July 2003), retailsales volumes grew 8.6% on average per year. The stock of commercialspace, however, only rose 2.0% on average in the same period.

A large shortage of retail space helped explain the surge of retail rents in recent years. Going forward,retailspace expansion will be even slower. Space is estimated to increase only 5.4 million sq ft over from 2012 to 2016, compared to 6.2 million sq ft over 2007-2011, according to Jones Lang LaSalle.

Retail sales volume, on the other hand, will grow steadily on the back oftouristspending and a resilientlocal labor market(already up 15.5% YTD). Such shortage of retail space has prompted retailers to mark-up prices orsell more expensive products.

Upward revision in the minimum wage to $30 per hourfrom $28 effective from May 1 will add exacerbate cost push inflationary pressure in the months ahead. Inflation on a wide variety of goods and services will likely remain sticky for a while. Taking all ofthese factors into account, we are revising up our full-year CPIforecastfrom 3.5% to 4.5%.