Strap in for explosive growth of residential market this quarter – here’s how we can tell

On 27 May 2022, the Rating and Valuation Department issued its latest residential price index, which has recovered after falling for three consecutive months. The index reported 384 points in April, rebounding by 0.5% month-on-month. In the first four months of this year, the property price index fell by 2.51% compared to January (393.9) and April (384). If we compare those figures to the historical high of 398.1 points in September last year, it is still down 3.54%.

All residential price indices rebounded month-on-month (MoM), regardless of flat type or area. So what information can we glean from this? First, large units did better than small or medium-sized units, reporting 310.5 points in April, up 0.75% from March, while small and medium-sized units reported 387.2 points in April, up about 0.49% from March.

Class E (1,722 sq. ft. or above) indices recorded the most significant increase, reporting 307.2 points in April, nearly 2% up from the 301.2 points recorded in March. Less than 20 known Class E units were transacted in March, and most of them were remaining pre-sold units from completed developments.

Class C (753 to 1,076 sq. ft.) and Class A (under 431 sq. ft.) units followed closely with a monthly rise of 0.92% and 0.86%, respectively. Class D units (1,076 to 1,721 sq. ft.) rose to 0.39% in April and Class B units (431 to 752 sq. ft.) to 0.22% MoM. After the new MIP scheme came into effect, many buyers sought the larger (Class C) units to get 80% financing on a price ranging from HKD10 million to HKD12 million, which stimulated April prices.

Price Indices from 2009 - April 2022

Source: RVD

April’s property price index mainly reflects market conditions from mid-March to early April, when the Fifth Wave of COVID-19 stabilised, and the government gave a month’s notice that social distancing measures would be relaxed in stages. The conditions stimulated the market, and many prospective buyers expedited their plans.

Given that the number of transactions has rebounded significantly, and at some of the Top 10 Estates, several buyers competed for the same units, owners have gradually narrowed the bargaining space and even reversed the status quo by increasing their prices.

Second-hand owners are increasingly ambitious, so I expect May’s property price index to expand to 1% or 1.5%.

When we checked the latest residential transactions number as at 26 May 2022, we can see that the primary volume was up four times to 1,374 transactions. And secondary sales recorded a 16% increase up till 26 May.?

2022 Private Residential Transaction (From Jan - 26 May)

Source: Midland Research

Source: Midland Research

Unfortunately, when I compared these figures year-on-year, from January to May 2021, 2022’s transactions were significantly behind by 45.8% in direct sales and 37.7% in secondary sales.

So, what’s going on?

1)??The market only began to improve when the Fifth Wave slowed from the end of April.

2)??New Chief Executive John Lee will be on board from 1 July 2022, and everyone wants to see what he has planned to tackle the city’s housing problems.

3)??The overall economy needs time to recover at a steady pace.

4)???Developers only started launching new developments at the end of April, so we expect increased transactions in June reports.

Comparison of Private Residential Transactions in First 5 Months (2021 vs 2022)

Source: Midland Research

1)??Conservative Scenario

I referenced the lowest primary and secondary transaction numbers from 2012 to 2022 to consider a slow market recovery. I chose primary sales from 2013 and secondary sales from 2016. These two markets can predict what will happen from June to December 2022. So, how many direct transactions took place in these two years?

Primary sale: 9,986 – 3,435

= 6,551 / 6 mths

= 1,092 each month for the next six months

According to the HKET, 7,200 primary units will come on the market in June, mostly located in Kowloon and New Territories.

For secondary sales predictions:

40,466 (2016) – 16,911 (till 26 May)

= 23,555 / 6 mths

= 3,926 monthly transactions (at least).

2)??Ideal Scenario

I will use primary sales from 2021 instead of 2012 (after 2012 Oct the SSD and BSD were announced):

17,475 – 3,435

= 14,040 / 6,

= 2,340 per month for the next half year.

For the second-hand sales we can assume

60,332 – 16,911

= 43,421 / 6

= 7,237 per month.?

Overall Private Residential Transactions 2021 – 2022 (until 26 May)

Private Residential Transactions 2021

Source: Midland Research

Source: Midland Research

In my experience, one can’t write off the demand for homes because of the pandemic. The pandemic only slowed buyers' plans to buy or exchange flats. That appetite will be easily stimulated once restrictions are dissolved and the economy recovers. Seeing the speed of sales at Grand Mayfair I and II – out of 1,520 units, 1,355 (89%) were sold in May – we know the purchasing power is still there, and occupiers and investors are willing to put capital into residential property.

Therefore, I conclude we are more likely to see the ideal scenario from June to December. ?

If the pandemic remains stable and controlled, property prices will rise in June, when the market is expected to recover about 3 of the 5% predicted this year. Hopefully, we will return to what we saw in 2021 when mid-year prices were close to what they were by year-end. So, depending on economic performance, the magnitude of the US interest rate hike and the strength of Lee’s residential supply policy, we look on track to achieve the 5% forecast for the rest of the year.

Thank You