Hong Kong's Property Market Is Tumbling As Unsold Homes Pile Up
Higher borrowing costs add to the slump caused by Covid Zero curbs, brain drain, and political turmoil.
(Bloomberg) -- On a recent Saturday, more than 100 salespeople swarmed the floors of a luxury shopping mall in Hong Kong, haranguing shoppers to check out deals at one of the city’s latest residential projects.
One Innovale - Bellevue, built by Henderson Land Development Co., priced its first batch of apartments 9% lower than the nearby second-hand homes in New Territories, about 25 miles from the Central financial district. But the response has been below par since its launch last month: about a third remained unsold as of the first week of October.
It’s even worse for others. At the end of the first day on sale, a 139-unit development failed to move a single unit — rare for a city where projects get snapped up within hours in a robust market. Another widely-advertised project only found buyers for two units throughout the day, according to sales records.
“We are fighting for fewer customers due to concerns about interest rates,” said realtor Sam Wong. “Everyone is competing to be cheaper.”
The sliding demand shows how a city at the forefront of a global property downturn is bracing for an even deeper slump in coming months as interest rates rise. Higher borrowing costs are weighing on an economy already battered by population outflow, Covid curbs and political turmoil caused by Beijing’s tightening control. Goldman Sachs Group Inc. sees home prices plummeting 30% through 2023 from last year’s levels, while Jefferies Group LLC predicts further declines after an 8% drop this year. The secondary-market is approaching a five-year-low.
Real estate has remained at the center of Hong Kong’s $368 billion economy, mainly through wealth created by high valuations — a result of the territory’s scarce land resources. Seven of the city’s 10 richest home-grown tycoons had their fortunes built on property. Home ownership is an important indicator of success for Hong Kong’s residents, who have considered it a safe bet after a two-decade bull run. A declining market is threatening to dent that sense of well-being, which could indirectly weigh on spending.
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The latest data from the Hong Kong Monetary Authority — which has raised benchmark rates five times this year — show mortgage loans approved in July dropped 22.1% from June, and declined 3.9% in August month-on-month. Those financing secondary-market transactions, in particular, plummeted 30.3% in July and 11.1% more in August.
Hawkish signals from US Federal Reserve officials mean more interest-rate hikes are likely in Hong Kong as well. The HKMA moves in lockstep with the Fed as the local currency is pegged to the greenback. Last month, banks in the city including HSBC Holdings Plc and Standard Chartered Plc raised their main lending rates for the first time since 2018. They have also increased the mortgage price caps for Hibor-linked loans, to which 97% of Hong Kong’s home buyers are tied.
Hong Kong’s economy may potentially contract this year, with the city downgrading its annual economic forecast twice and Financial Secretary Paul Chan warning of a fiscal deficit that is double the budget estimate.
“A higher interest rate usually contracts economic activity, especially considering the already weakened demand in Hong Kong under the pandemic and control measures,” said Aries Kin-Ming Wong, who teaches economics at Hong Kong Baptist University. “It can have an even greater impact on property markets as the recent wave of emigration has already put a downward pressure on the prices.”
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The city’s shrinking labor force and diminishing appeal for mainland buyers have also added to the woes. Stringent Covid quarantine requirements, which were in force until recently, have resulted in a brain drain, with official figures showing a record population drop.
Beijing’s tightening grip has also taken the sheen off Hong Kong for those affluent mainlanders seeking to hedge their assets. Instead, they are eyeing places including Singapore, Australia and California.
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Despite the falling prices, affordability isn’t getting any better. In fact, apartments in the city are on track to become the least accessible to buyers in 24 years due to a tightening monetary environment.
A 250-square-feet studio, smaller than an average parking lot, is selling for more than $500,000 in the emerging middle-class neighborhood of Kai Tak. With that kind of money, one can buy a unit near Soho in New York.
“Everyone can feel the market worsening — interest rates keep rising and the local economy is not doing great,” said Greg Cheung, 37, who has been looking to buy a home in Hong Kong for a few years. “I have less desire to buy now.”
Unless home values drop between 15% and 30% from their all-time high, the pricing at the moment does not justify a purchase, Cheung added.
Hong Kong’s high proportion of financial industry workers also makes the city more vulnerable to Wall Street layoffs. Giants including Goldman Sachs and UBS Group AG have started cutting jobs in the region, partly due to a slowdown in China that’s hammered dealmaking.
“Sellers have to cut their prices several times before buyers accept a deal and many of them have become disheartened,” said Jason Hau, who works for Centaline Property Agency Ltd. “It wasn’t as bad even during the 2008 financial crisis.”
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