Despite government intervention to prevent property speculation, housing prices in Hong Kong continue to rise. In August 2010, housing prices were up substantially from the same period a year earlier. At the same time, the number of housing transactions declined while the number of foreign investors purchasing Hong Kong properties also subsided. See the following article from Global Property Guide for more on this.
Hong Kong’s house prices have continued to rise, but at a slower pace following intense government efforts to curb speculation. Property transactions are starting to fall, and demand from foreign buyers is decreasing.
Property prices were up 20.6% from a year earlier in August 2010, according to the Ratings and Valuation Department (RVD). Adjusted for inflation, house prices rose 17.2%. Though double-digit house price increases continue, the rate of growth has noticeably eased since March 2010, when house prices rose by 31.3% from a year earlier.
Property prices rose by 28.5% y-o-y in 2009, after a 10.6% drop in 2008.
Speculators had been driving up Hong Kong prices. Aside from buyers from Mainland China, Russians, Japanese and other Asian buyers were spotted buying luxury Peak properties. Investors-cum-speculators included companies “diversifying” into other fields.
The buying frenzy was fueled by robust economic growth and the very low interest rates in the US—mirrored in Hong Kong, due to the currency peg. Foreign trade is the key driver of Hong Kong’s economy.
Hong Kong Island, Kowloon and the New Territories all saw strong price increases in the year to end-August 2010.
Analysts project price increases of around 15% over the next 12 months, according to Lee Wee Liat of Samsung Securities Ltd.
The government has intervened decisively
To discourage property speculation, on 1 June 2010 the government implemented nine market-cooling measures, including:
- New guidelines for developers requiring full disclosure, and restricting overly aggressive advertisements including the use of “show flats”.
- Developers are required to announce house prices three days before selling any unit, and to disclose transactions involving company executives and their relatives.
- The government raised the stamp duty for luxury homes and promised to increase land supply.
- In August 2010, the government pledged to sell more land to private property developers.
- The government will also supply about 61,000 private housing units over the next 3 to 4 years.
- The government will temporarily stop offering residency to foreign property buyers (the Capital Investment Entrant Scheme); instead, it plans to introduce a rent-to-buy program for first-time homebuyers.
- The government capped residential mortgages worth HK$12 million (US$1.55 million) or more at a 60% LTV ratio (the previous mortgage cap had a HK$20 million (US$2.58 million) threshold).
Housing sales are falling
In September 2010, the total number of sales transactions was 13,749, down 18.9% from the previous month, according to The Land Registry. When compared to the same period last year, sales transactions dropped 4.8%.
The total value of sales transactions also dropped 40.5% to about HK$41.2 billion (US$5.3 billion) in September 2010 from HK$69.2 billion (US$8.9 billion) in the month earlier. On a yearly basis, the total value of sales transactions fell by 26.7% over the same period.
Total domestic sales and purchase agreements were 115,101 in 2009, up 20% from 2008, according to the RVD.
Due to the restrictive measures introduced by the government in the second half of 2010, property transactions are expected to drop further for the remainder of the year.
Housing supply will soon increase sharply
Dwelling completions are projected to almost double in 2010, to 14,259 units, partly attributable to the government’s efforts to curb house price rises. In the year to August 2010, total dwellings completed were 8,196 units, according to the RVD.
Since 2002, the Government (which owns virtually all land in Hong Kong) had more tightly limited the supply of new land for housing purposes, and housing completions have been falling.
- In 2009, completed dwellings decreased by 18.2% to 7,200 units,
- In 2008 completions dropped16.2%
- In 2007, completions declined 36.7%.
The tight supply of new houses has arguably contributed to the steep property price rises of recent years.
In October 2009, the government released an additional 1,000 units of old buildings for re-development.
Then in 2010, the government supplied more land for residential developments. In the fiscal year ending March 2011, the government has already held 8 land auctions, making the year one of HK’s most active for land sales. On November 3, 2010, the government plans to sell another land site.
Robust mortgage market, low interest rates
The Hong Kong best lending rate fell to 5% from 5.25% as the US Federal Funds rate dropped to 0.13% in December 2008 from 1.5%, and has remained at that level since.
Hong Kong’s mortgage market was 39.3% of GDP in 2009, up from 35.1% of GDP in 2008. As of August 2010, total outstanding residential mortgages up 14.4% on the same period last year at HK$706.7 billion (US$91 billion), based on Residential Mortgages Surveys conducted by the Hong Kong Monetary Authority (HKMA). New residential mortgage loans approved rose 11.6% in August 2010 from the previous year.
In monetary terms, however, approvals for primary market transactions dropped 31.8% while those for the secondary market increased by 2.7%.
Poor rental yields
Rental yields are extremely low in Hong Kong. Gross rental yields are around 2.4% in high-end areas. Yields for Property Class A to C (properties with an area of 99.9 m2 and below) are also low at 3% to 3.9% in August 2010, based from latest figures released by the RVD. Yields are even lower for larger properties. For property Class D and E (with an area of 100 m2 and above), yields are about 2.4% to 2.7%.
House prices in HK rose by an overall 41% from 1999 to 2009 while rents rose by just 13% over the same period.
In August 2010, the average rent in Hong Kong for Property Class A (less than 40 sq. m.) was HK$310 (US$40) per sq. m. while it was HK$420 (US$54) per sq. m. for Property Class E (160 sq. m. and above), according to RVD.
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 Global Property Guide research conducted in April 2010, residential properties in the New Territories generate the highest average yield of 3.6%. In Mid Levels, a posh residential area in the Hong Kong Island, the average rental yield is about 3.4%. Residential properties in Properties in The Peak, Hong Kong’s most prestigious neighborhood, generate an average of 2.3% yield. Yields estimated by the RVD are comparable to Global Property Guide figures.
However, since Hong Kong’s yields have been low for the past fifteen years, the investment risks may actually be lower than they appear.
Strong economic growth
Hong Kong’s government has raised its GDP growth forecast to 5%-6%, from an earlier projection of 4%-5%, on the back of stronger-than-expected GDP growth in Q2 2010. In the second quarter of 2010, Hong Kong’s economy grew by 6.5%, after an 8% GDP growth rate in Q1 2010, according to the Census and Statistics Department (CSD).
Exports rose 31.5% in the year to August 2010, and imports increased by 21.3%, according to the CSD.
HK’s economy contracted by 2.8% in 2009 due to the global economic crisis. After spectacular GDP growth of 7.2% annually from 2004 to 2007, economic growth slowed in 2008, with just 2.2% GDP growth.
In 2010, 2.7% inflation is expected, up from 0.5% in 2009, according to the IMF.
In the third quarter of 2010, HK’s seasonally-adjusted unemployment rate was 4.2%, unchanged from the previous quarter, according to the CSD. However, economists expect unemployment to fall to 4% by the end of 2010 as domestic demand continues to grow.
Big public housing sector
The Hong Kong Housing Authority produced 15,389 public rental units in 2009/10, down 19% from the previous fiscal year.
Hong Kong has one of the largest public housing sectors in the world. As of 2009, 47.1% of the total population or around 3.3 million people live in public housing. While 29.1% of Hong Kong’s population live in rental flats, 18.1% live in private flats subsidized by the government.
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.
This article has been republished from Global Property Guide. You can also view this article at Global Property Guide, an international real estate analysis site.