Hong Kong Economy: Property Market Flat but More Flats Needed

British Consulate General Hong Kong

June 2013

Summary

Government measures to dampen property demand have begun to cool the market but prices remain unsustainably high.

Detail

 Unhealthily high property prices

 The market consensus is that Hong Kong property prices are unhealthily high. Since the 2008 financial crisis, Hong Kong has experienced three years of sustained price rises and a 25 per cent increase in 2012 alone.  In March this year, housing prices exceeded the previous 1997 peak by 38 per cent.  Affordability also deteriorated with home prices standing at 13 times average incomes. The close correlation between retail, commercial and residential property means prices have also risen in these sectors.

 Hong Kong’s growth prospects are heavily influenced by the slowdown in China and US recovery, the former due to the impact on consumption, the latter because of the link between the Hong Kong and US dollar and interest rates.  This prospective slowdown in Hong Kong’s growth suggests that high property prices cannot be sustained long-term.  

 

Government action and market reaction

 The government has long warned of the potential for an asset price bubble. The IMF and HKMA too have identified property prices as the biggest risks to Hong Kong’s economic wellbeing. In February, the Government responded with a battery of macro-prudential measures. Prominent among these was the application of Double Stamp Duty on all properties – this in addition to a 15 per cent Buyers’ Stamp Duty and a 5 per cent Special Stamp Duty introduced in October last year.

 

Property prices have fallen 4 per cent between February and April, suggesting that the market has plateau-ed.  Demand has also dropped as planned with the volume of property transactions down by 54 per cent in May compared to a year earlier.

Analysts have generally welcomed the cooling measures and agree they have been effective in dampening demand in the short-term; but opinion is divided about how effective these measures will be over the coming months.  Hong Kong’s central banker-equivalent Norman Chan said recently that, despite the drop in demand, property prices were not falling significantly.  A member of the government’s Long Term Housing Strategy Steering Committee went further, suggesting that even stricter measures such as further stamp duty hikes and a ban on mortgages for second properties should be imposed if prices do not fall by at least 20 per cent in the immediate future.  The Special Stamp Duty has also been criticized by foreign and local businesses, including the British Chamber of Commerce, as harmful for small and medium sized businesses.Analysts have generally welcomed the cooling measures and agree they have been effective in dampening demand in the short-term; but opinion is divided about how effective these measures will be over the coming months.  Hong Kong’s central banker-equivalent Norman Chan said recently that, despite the drop in demand, property prices were not falling significantly.  A member of the government’s Long Term Housing Strategy Steering Committee went further, suggesting that even stricter measures such as further stamp duty hikes and a ban on mortgages for second properties should be imposed if prices do not fall by at least 20 per cent in the immediate future.  The Special Stamp Duty has also been criticized by foreign and local businesses, including the British Chamber of Commerce, as harmful for small and medium sized businesses.Long-term outlook – Bumpy road aheadAnalysts have generally welcomed the cooling measures and agree they have been effective in dampening demand in the short-term; but opinion is divided about how effective these measures will be over the coming months.  Hong Kong’s central banker-equivalent Norman Chan said recently that, despite the drop in demand, property prices were not falling significantly.  A member of the government’s Long Term Housing Strategy Steering Committee went further, suggesting that even stricter measures such as further stamp duty hikes and a ban on mortgages for second properties should be imposed if prices do not fall by at least 20 per cent in the immediate future.  The Special Stamp Duty has also been criticized by foreign and local businesses, including the British Chamber of Commerce, as harmful for small and medium sized businesses.

Property market watchers agree there is no quick fix to Hong Kong’s housing pressures; the long-term solution is contingent on a long-term strategy for supply.  They and the Government agree that there are multiple factors stymieing attempts to build a long-term strategy for supply.  These include difficult trade-offs between cultural and environmental preservation, demand for land from diverse stakeholders and the vested interests of the ‘Big Four’ property developers in Hong Kong.

…But it is a road that must be travelled

 

Nevertheless, the Government has committed to finding a long-term solution to the supply problem. Being the city’s biggest landlord, the Government has set itself an initial target of 67,000 new units by 2016/17.  More recently, the Long Term Housing Strategy Steering Committee (LTHSSC) has identified a need of 447,000 new homes over the next decade. Yet, the committee agreed that shortages would remain even if this supply target is met.  Furthermore, there are early signs that the developers may be willing to move to a more cooperative stance – in mid June one developer offered to trial the donation of rural land to government for housing development.  The LTHSSC suggested that private developers should help to provide subsidizing homes to the market. 

 But these initial efforts are coming up short of the mark. Market analysts and property experts agree Hong Kong needs 20-23,000 new units annually to fix the supply issue; the 67,000 target is therefore insufficient to meet this figure. Meanwhile, the LTHSSC has yet to set clear direction on a promised comprehensive housing demand review or to commit to a deadline for its recommendations to the Government.

 

Comment

It seems likely that the government’s measures have staved off the risk of an asset bubble or property crash in the near future.  But an earlier than expected hike in US interest rates (which would directly affect Hong Kong’s interest rate under the dollar peg system) would increase the prospects of a hard landing for the sector.

 The longer-term solution relies on fundamental reform to supply. There is no doubt of the Government’s willingness to act; but the window to meet its 2016/17 target is shrinking and there is no clear timeline for implementing a longer-term plan.

Uncertainty over the supply issue will have an impact on Hong Kong’s long-term competitiveness. In May, the Institute of Business Administration suggested that Hong Kong had fallen from 1st to 3rd most competitive city in the world.  And a recent study by Savills concluded that Hong Kong was the most expensive city in the world in which to locate a business. 

A price readjustment is important for UK interests.  A price drop would benefit a number of large established UK interests; encourage big UK brands to follow the example of one major retailer, which in mid June opened a new flagship store in Central Hong Kong; and support smaller UK firms that are currently shut out by high prices, e.g. in luxury retail, to establish a presence here.

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.

Countries: Hong Kong
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