Increased Activity of Investors and Upgraders in the Residential Market Following Interest Rate Reduction

The Rating and Valuation Department has recently released the latest property price index data. In August, the property price index stood at 292.1 points, a 1.72% decrease compared to July's 297.2 points. This marks the fourth consecutive monthly decline and a nearly 9-year low (291.5 at February 2015).

In contrast, the rental index for August continued its upward trend, reaching 197.5 points, up 1.13% from July. This represents the sixth straight monthly increase and a nearly 5-year high (197.4 at September 2019).

Across different unit types and sizes, all indices experienced a monthly decrease exceeding 1% in August. Small to medium-sized units (Class A, B & C) saw a 1.71% decline, with an index of 292.1 points. Large-sized units (Class D & E) recorded a 1.27% drop, with an index of 271.1 points.

Notably, Class A units had the most significant decrease, with a 1.84% month-on-month drop to 310.2 points, close to the record low in December 2014 (304 points). Class C units experienced a 1.7% decline, falling below the 280-point mark for the year and approaching the level recorded in December 2016. Class B and Class E units saw respective monthly declines of 1.69% and 1.63%, with reported indices of 285.3 points and 265.6 points. Class D units reported an index of 272.7 points, representing a 1.2% monthly decrease. Additionally, Class E units recorded fewer than 20 transactions again, a situation not seen in 5 months, with a value of 265.6 points and a 1.6% monthly decrease.

Cumulatively for the eight months, property prices have fallen by 5.65%. When compared to the historical peak of 398.1 points in September 2021, the accumulated decline in property prices has widened to 26.6%.

Conversely, all rental indices showed an upward trend, with small to medium-sized units experiencing the largest increase at 1.2%, reaching 201.8 points in August. This marks the first time since September 2019 that the index has surpassed the 200-point threshold. Large units saw a 0.26% monthly increase, reaching 151.6 points.

Rents eased across all categories except one, with Class C units showing the highest increase at 168.4 points, representing a 1.69% monthly increase. Classes A and B followed closely at 219 and 197.3 points, respectively, with a 1.25% and 1.28% monthly increase. The Class E index reached 142.8 points in August, reflecting a 0.35% monthly increase. The Class D index maintained an upward trend at 155.5 points, the same level as in November 2019.

The rare phenomenon of "rent increase and price decrease" has been observed for the past two years. This trend has led to an increase in rental yield. According to the latest data from the Rating and Valuation Department for July, the rental yield for Class A units is around 3.6%, compared to about 2.8% at the end of 2022, marking an increase of 0.8% and reaching a new high in about 12 years. With the widening trend of "rent increase and price decrease," it is expected that the rental yield will continue to rise.

Major banks have reduced interest rates by 0.25% on September 19, 2024. Taking advantage of this, developers have resumed launching new properties at lower prices, seizing market attention. In the short term, property prices are likely to be under pressure. Last Saturday (September 28), there were two residential projects launched for sale by Emperor International and Sun Hung Kei Properties, ONE JARDINE'S LOOKOUT (Happy Valley) and YOHO Hub II (Yuen Long). ONE JARDINE'S LOOKOUT has been on sale for about 4 hours, and all 85 units have been selected. YOHO Hub II has sold 112 units, equivalent to 93% of the total 120 units launched on Saturday.

Currently, with high inventory in new developments, developers are seizing the opportunity to lower prices, putting further pressure on the secondary property market. Secondary transactions still primarily focus on low market prices and concessions, and property prices have not yet stopped falling after the rate cut. However, upgrade buyers are also seizing this opportunity to upgrade to larger units.

According to the transaction record of Centaline Agency, there were nine secondary transactions over HK$15 million after September 19, and five of them were over HK$20 million. Their flat size was Class C and D units, with the latest Class C unit indices close to 2017's indices and Class D unit indices close to 2016's indices. These upgrade buyers usually paid half or more of the flat price for the first payment. After the fixed deposit rate decrease, they believe this is the right time to change to a larger size, and they expect that residential prices will be stable and have an upward trend in the long term, so they are extracting their deposits into the residential market.

Following the interest rate cut in Hong Kong, there has been an increase in transaction volume in both the primary and secondary property markets. However, given that Hong Kong banks have only reduced interest rates by 0.25% at present, the magnitude is not sufficient. The market expects that at least another rate cut by the Federal Reserve in the United States, or an accumulated reduction of 0.75%, is needed to have a more significant uplifting effect on the property market.

With the official start of an interest rate reduction cycle, mortgage rates are expected to continue to decline, easing the burden of property expenses. Conversely, rising rents may prompt tenants to consider buying, leading to an increase in cases of "rent to buy." Additionally, with rental yield continuing to rise and periodic interest rates decreasing, the fluctuation in these factors is likely to attract investors to enter the market for long-term rental income.