Hong Kong's property prices may continue to fall in 2019

Slowing Chinese buyer demand and rising mortgage rates will drive down prices.

Hong Kong’s pricey property market may continue to cool in 2019 as weaker property price tags are forecasted to be driven down by continued poor affordability, rising mortgage rates and slowing demand from Chinese buyers, according to a report by Fitch Solutions.

Whilst Hong Kong’s residential property price is still considered as highly overvalued, there is likely more room for prices to fall before it reaches a ‘fair’ level, the report stated.

Also read: Property sales plunge 48% in November

“The Hong Kong market has been the least affordable for the eighth straight year in 2018 in the Demographia International Affordability survey, with the median house price to income ratio coming in at 19.4 from 18.1 in the previous year,” Fitch Solutions highlighted in its report. “Hong Kong residential real estate prices have tripled since the global financial crisis, far outstripping the nominal growth of the economy.”

That being said, the Centaline property price leading index has fallen 6.3% from the peak in July. bringing the YoY decrease to 7.1% in December compared with the 23% YoY peak growth seen in June 2017, the report found.

“The Land Registry showed that the number of residential unit transacted declined to 2,635 in November, marking the lowest figure since Q1 2016,” Fitch Solutions said in its report. “

As sentiment towards the country’s housing market turns negative, property developers are offering discounts and enticements such as cash rebates and shopping vouchers at new projects, the report revealed.

Also read: All roads point to a correction for Hong Kong's weakening property market

In addition, rising domestic interest rates are forecasted to weigh on new home sales and prices.

“Hong Kong’s currency peg to the USD means that Hong Kong’s interest rate will likely rise in tandem with that of the US to prevent significant capital outflows, resulting in higher mortgage costs over the coming quarters,” Fitch Solutions explained. “This will reduce liquidity which has been a key source of support for the property market over the past decade.”

Meanwhile, Hong Kong properties may be negatively impacted by the depreciating Chinese yuan as a result of downside pressure on the Chinese economy due to its ongoing trade conflict with US. The Chinese yuan is forecasted to average US$1.03 in 2019 from an average of US$0.96 in 2018 on the back a loosening bias by Chinese policymakers in an effort to cushion decelerating growth from external headwinds.

Consequently, property developers are expected to become increasingly cautious in embarking on new projects and developments which in turn will weigh on Hong Kong’s real gross domestic product (GDP) growth.

Hong Kong’s real GDP growth in Q3 2019 showed that real growth for the building and construction sector shrank 0.3% YoY versus 1.6% YoY in Q2 despite the private sector contributing positively by 0.6% points. Overall real GDP growth is forecasted to come in at 3.3% in 2018 before slowing down to 2.5% in 2019, according to Fitch Solutions.

“This will be exacerbated by the government’s policy on vacant private residential units that was adopted since the middle of 2018, at a time when it will become increasingly difficult to clear inventory as the downward cycle gathers momentum,” Fitch Solutions added.

Also read: Developers slash unsold home prices as vacancy tax kicks in

Property developers will be taxed on vacant private residential units on the primary market that have not been occupied for more than six of the last 12 months at 200% of the rental value. This is equivalent to approximately 5% of the property value, assuming a rental yield of 2.5%, Fitch Solutions explained.

Signs are already pointing to residential property developers being cautious, as according to data from the Hong Kong Monetary Authority (HKMA), loan growth for residential property development softened to 2.7% YoY in September from a peak of 24.8% YoY during the same period in 2017.