Hong Kong’s property prices may fall 25% from the last peak before it recovers

With the perfect storm of yet another economic recession and sharply rising interest rates following the Fed, Hong Kong property prices should keep falling in the short run. The question is how deep the dive will be and when it will end, especially given the recently stronger structural headwinds, such as depopulation. In this note, we evaluate the key factors behind Hong Kong's property slump and try to forecast the likely timing when the market faltering will grind to a halt using econometric tools.

Although there is no sign that cyclical headwinds are fading, some of the factors behind, such as Covid-related restrictions and high interest rates, should eventually ebb. Beyond the cyclical above, structural factors, including demographics, economic growth prospects, and household purchasing power, may deem even more important in medium-term home prices. Finally, the supply of land and housing construction are also key.

First and foremost, population growth plays a decisive role in Hong Kong's home demand. While there is pressure from the deteriorating fertility rate and rapidly aging population, the collapse of immigration and the heated emigration wave have added fuel to the fire. The city’s eroded competitiveness due to the lost years during Covid coupled with investors’ pursuit of diversification to buffer the US-China tensions also affected Hong Kong's attractiveness, as reflected in the increase in the reduced number of Asian headquarters for foreign companies in favor of Singapore. While the new policies to lure talent will be helpful, it is too early to tell whether such policies will work.

Hong Kong's weaker growth potential is another key factor to watch amid Mainland China’s structural slowdown. Weaker growth can hurt households’ purchasing power. As a matter of fact, Hong Kong's economy will still be 3% lower than the pre-pandemic level by the end of 2022, far behind the average growth of 6% for the rest of Asia.

Beyond demand, home supply is also a major uncertainty. Once again, the incumbent government has vowed to address the affordability problem in Hong Kong’s housing market by expanding the land supply. Words can be loud, but it is the action that matters. The reality is that additional land supply has always fallen short of the government’s goal for the past ten years.

Based on our quantitative model incorporating the above factors with the assumption of a moderate increase in land supply, Hong Kong home prices will fall 12% in 2023 but much less at 2% in 2024. It means Hong Kong property price will eventually decline 25% from the last peak at the end of 2021. It should be noted that our forecasts are subject to a number of policy changes that could buffer the decline. The faster-than-expected reopening of Hong Kong to Mainland China can boost household confidence and demand from Mainland buyers. The government also holds the key to easing macro-prudential measures to shore up home prices. Both factors can bolster Hong Kong's property market to recover faster than our baseline forecast.?

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