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It appears a slowing economy and government cooling measures are having little impact on Hong Kong’s residential property market as prices continue to increase. The Ratings and Valuation Department reports that prices were up just over 19% when adjusted for inflation for the year ending in November 2012. Experts attribute the price growth to low interest rates and low housing supply despite the fact that nearly 50% of all Hong Kong residents live in public housing and overall sales are dropping. For more on this continue reading the following article from Global Property Guide.

Property price increases in Hong Kong are now accelerating again, despite the economy slowing.

During the year to end-November 2012 house prices skyrocketed by 23.74% (19. 22% inflation-adjusted), the highest year-on-year increase since June 2011, according to the Ratings and Valuation Department (RVD).

Smaller-sized residential properties have seen the highest price increases. During the year to November 2012, the average price of apartments smaller than 40 sq. m. rose by 27%, 25% for 70-100 sq. m. apartments and 4% for 100-160 sq. m. apartments.

HOUSE PRICE CHANGE, NOVEMBER 2012

SIZE
Kowloon
(y-o-y)
New Territories
(y-o-y)
Hong Kong
(y-o-y)
Average price per sq. m. (Hong Kong)
HK$
US$
Less than 40 sq. m
33%
37%
27%
122,346
15,775
70 – 100 sq. m.
19%
37%
25%
155,540
20,055
100 – 160 sq. m.
9%
-9%
4%
189,194
24,395
Source: Ratings and Valuation Department (RVD)


Property prices in Hong Kong have surged 73% (56% inflation-adjusted) over the past three years, propelled by very low interest rates and strong foreign demand.

  • In 2009, property prices rose 28.5% (26.6%)
  • In 2010, house prices rose 21% (17.6%)
  • In 2011, house prices rose 11.1% (5.1%)

"The property sector is the main source of domestic economic risk," the IMF said recently. "The sharp run-up in house prices raises the risk of an abrupt correction.”

To curb speculation, the government imposed another round of property measures at the end of 2012:

  • In October 26, 2012, the government introduced a 15% tax on property purchases made by foreigners.
  • The government also raised special transaction taxes to as much as 20% on properties sold within three years of purchase.

Rent increases have been more muted. In November 2012, the average monthly rent for 70-100 sq. m. apartments in Hong Kong rose by 2.2% y-o-y to HK$371 (US$48) per sq. m., according to RVD. Over the same period, the average monthly rent for 70-100 sq. m. apartments in Kowloon dropped by 8.8% to HK$249 (US$32) per sq. m. while in the New Territories, rents rose by 11.2% to HK$218 (US$28) per sq. m.

Property prices in Hong Kong are expected to continue rising in 2013, albeit at a slower pace, according to local property experts.

Hong Kong’s economic growth slowed to 1.25% in 2012, down from 5% in 2011 and 7.1% in 2010, according to the IMF. The economy is expected to grow by 3% in 2013, supported by a recovery in exports and stable domestic consumption.

Declining housing sales

Hong Kong’s total domestic sales and purchase agreements fell 37.8% in 2011 to 84,462, from 135,778 in 2010. Transactions fell 20.3% on the primary market, and 39.8% on the secondary market.

These declines reflect the government actions such as the Special Stamp Duty (introduced in November 2010), the Hong Kong Monetary Authority’s (HKMA) lowering of LTV ratio and other credit tightening measures to slow speculation activity in the housing market.

Stable housing supply, more land sales

Housing supply is still tight in Hong Kong. Housing vacancies fell 0.4 percentage points from 4.7% of the total stock in 2010, to 4.3% in 2011. Housing completions fell to 9,449 units in 2011, from a four-year high of 13,405 units in 2010, partly due to limited housing land supply.

Housing supply is expected to rise to 11,888 units in 2012, and 14,928 units in 2013. Most of the new supply is in the New Territories.

Since 2002, housing completions have been falling, as the Government (which owns virtually all land in Hong Kong) tightly limited the supply of new land for housing.

  • In 2009, completed dwellings decreased 18.2% to 7,157 units.
  • In 2008, completions dropped 16.2%,
  • In 2007, completions dropped 36.7%.

The tight supply of new houses has arguably contributed to the steep property price rises of recent years.

The Government designated around 52 residential sites in the 2011-2012 Land Sales Programme. Around five were sold by the government through public tender in Q1 2011, according to Colliers. The Government offered four more residential sites for sale by public tender in Q2 2012. Around 400 residential units are expected to be produced from these four sites.

Shrinking mortgages, low interest rates

The Hong Kong Monetary Authority (HKMA) still retains its best lending rate at 5%. It dropped from 5.25% to 5% in December 2008, when the Fed Funds rate declined from 1% to 0.13%, and has been unchanged since then.

Total outstanding residential mortgages were up by 4.6% during the year to May 2012 at HK$815.9 billion (US$105.2 billion), according to HKMA’s recent Residential Mortgages Survey, but proportionally this is a slight decline to 42.3% of GDP, from 42.5% of GDP in 2010. Mortgage growth is sharply down on last year’s growth of 15.5% y-o-y to May 2011, and on the previous year’s growth of 13.7% to May 2010.

Maximum loan-to-value (LTV) ratios were lowered by the HKMA’s latest residential mortgage tightening (June 2011):

  • Maximum LTVs for residential properties worth between HK$10 million (US$1.3 million) and HK$12 million (US$1.6 million) are now 50%;
  • LTVs for property transactions between HK$7 million (US$0.9 million) and HK$10 million are now 60%, with the maximum loan amount capped at HK$5 million (US$0.6 million);
  • The maximum LTV ratio for properties below HK$7 million is now 70%, with the loan amount capped at HK$4.2 million (US$ 0.5 million);
  • The maximum LTV ratio is at least 10 percentage points less, if the borrower’s principal income is not derived from Hong Kong;
  • All net worth-based mortgages had maximum LTV ratios lowered, from 50% to 40%.

In monetary terms, approvals for primary market transactions were up by 39.7% during the month to May 2012, while those for the secondary market dropped by 1.5%.

Rental yields are low

Hong Kong’s rental yields are extremely low. For instance, gross rental yields for Property Class A to C (properties with an area of 99.9 m2 and below) ranged from 2.8% to 3.6% in May 2012, according to the RVD’s latest figures. Yields for Property Class D and E (areas of 100 m2+) are around 2.6% and 2.2%, respectively.

The house price index in Hong Kong rose by 131% from 2001 to 2011, but the rental index rose by just 40%.

In May 2012, the average rent in Hong Kong for Property Class A (less than 40 sq. m.) was HK$328 (US$42.3) per sq. m., while the average rent for Property Class E (160 sq. m. and above) was HK$447 (US$57.6) per sq. m., according to RVD.

Demand for luxury residential properties with monthly rents of HK$80,000 and above has become weaker, with rents declining on South Side (5.3%) and The Peak (4.5%) during the three-month period to February 2012. Overall luxury rents from December 2011 to February 2012 for The Peak, Mid-levels and South Side, were down 3.2% q-o-q to HK$45.26 (US$5.84) per sq. ft., according to Colliers. Landlords are now more willing to renew tenancies at rents set two years ago.

Hong Kong is not a ‘typical’ market. It is a place where the rich choose to park assets in the form of apartments, as part of a diversified asset-safeguard strategy - like Monaco and Singapore. Such markets typically have lower rental yields than more ‘normal’ housing markets.

According to the latest Global Property Guide research in April 2011, the highest average yield of 3.4% was generated by residential properties from the New Territories. In Mid Levels, in a posh residential area in the Hong Kong Island, the average rental yield is about 3.3%. Meanwhile, properties in Hong Kong’s most prestigious neighbourhood, The Peak, yield an average of 2.13%. Yields estimated by the RVD are comparable to Global Property Guide figures.

Large public housing sector

Hong Kong has one of the largest public housing sectors in the world. Around 3.4 million people or 47.7% of HK’s total population lived in public housing in 2011. In 2011/12, around 11,186 public rental units were produced, down by 18% from the previous fiscal year, according to the Hong Kong Housing Authority.

Public housing in Hong Kong began as early as the 1950s as a way to provide citizens affected by wars and calamities temporary housing. In the 1970s, the government changed its policy to provide permanent public housing.

The Hong Kong Housing Authority (HKHA) offers three ways to assist low-income families to purchase homes:

  • Home Ownership Scheme (HOS): HOS flats are subsidized by the government. Selling under the HOS scheme was temporarily stopped from 2003 to 2006, and was resumed in 2007.
  • Tenants Purchase Scheme (TPS): The scheme offered those in public rental flats to buy the properties at below market cost. However, selling under the TPS scheme was halted in 2005.
  • Home Assistance Loan Scheme (HALS): Since 2003, the government offered low-income families interest-free loans payable up to 20 years. After government evaluation, the HALS was stopped in 2004, and the HKMA only maintains the payments of the loans.

Economic slowdown in Hong Kong

The spill-over from the global slowdown, the euro zone crisis, pushed Hong Kong’s GDP growth sharply down to 1.25% in 2012, from 5% in 2011 and 7.1% in 2010, according to the International Monetary Fund (IMF).

In the first 10 months of 2012, the value of HK's total exports rose by just 1% from last year while the value of imports increased 2.6%, resulting in a trade deficit of HK$385.7 billion (US$49.7 billion).

The economy is expected to expand by 3% in 2013, supported by a recovery in exports and stable domestic consumption.

In December 2012, the overall inflation rate was 3.7%, from 5.3% in 2011, 2.3% in 2010 and 0.6% in 2009, according to Census and Statistics Department (CSD).

In the 4th quarter of 2012, unemployment in Hong Kong was only 3.3%, according to CSD. But unemployment may now rise, as the uncertain global outlook has led to job cuts at financial institutions.

This article was republished with permission from Global Property Guide.