Hong Kong had a tough time in 2019 and suffered from a weakened economy, the ongoing trade war between the US and China, and violent protests.
All property sectors were affected badly by these events, especially the retail market, which saw some of the biggest declines. With a new year ahead, it’s time for us to analyze what we can expect from Hong Kong’s property market in 2020.
In this article, we review the following:
- Hong Kong’s Property Market in Recent Years
- Why is Hong Kong property so expensive?
- What can I expect from Hong Kong’s property market in 2020?
- Is buying property in Hong Kong a good investment?
Hong Kong’s Property Market in Recent Years
Hong Kong’s property market is the most expensive in the world, outperforming places like Singapore and Sydney. Real estate prices have increased by double digits, making property inaccessible to many locals.
In the second quarter of 2018, the year-on-year price increase was 13.5%, a bit higher than the price increase in the first quarter of 2018. At the same time, the average sales value per transaction increased by 8.4% according to Colliers.
Colliers also reported that the supply of residential units increased by 12% in 2018 compared to 2017. The luxury residential rents increased by 4% in 2018.
Nowadays, you can buy a 10-bedroom house in many European countries for the same price of a 28 square meter apartment in Hong Kong. Besides, the average price per square meter in Ho Chi Minh City is only 14% of that in Hong Kong.
Hong Kong Property Prices in 2019
Looking at real price levels, the average price per square meter was around USD 22,507 in April 2019. That’s almost twice as much as Singapore’s average of around USD 11,442.
Prices have grown strongly for over a decade, except for a brief slump in 2016 due to the mortgage rate hike. We also saw price decreases during the second half of 2018 and 2019. The Centa-City Leading Index CCL shows the price increases from 1996 – August 2019, which speaks for itself.
The government saw no other solution than to introduce regulatory changes and many Hong Kongers have turned their eyes to real estate market overseas, including Bangkok, Osaka, and Ho Chi Minh City, just to mention a few.
The Market Slowed Down in 2019
Due to the political unrest and ongoing protests, the market cooled down in 2019. Despite the drop of mainland Chinese buyers the market has been surprisingly resilient.
Prices went down merely 3% to 5% during the ongoing protests as of November 2019.
In mid-October, the government introduced new mortgage rules which positively affected the market. In the secondary market, sales more than doubled according to Midland Realty, as first-time buyers found it easier to get hold of property.
Why is Hong Kong property so expensive?
Hong Kong is an attractive spot for investors and entrepreneurs. Often called the crown jewel of Asia, you can enjoy some of the lowest tax rates in the world and many other benefits.
Below I listed the main reasons why property is so expensive in Hong Kong at the moment.
Lack of Space and High Demand for Real Estate
At the same time as the supply and availability of land area is scarce, Hong Kong has experienced a big demand for property.
It’s one of the most densely populated areas in the world with around 7,000 people per square kilometer. In some popular districts like Kwun Tong, the density reaches up to 60,000 people per square kilometer.
The World Economic Forum shows a chart showing the world’s most densely populated countries and territories, with Hong Kong in fourth place.
Land is Expensive for Property Developers
As explained in my separate guide about buying property in Hong Kong, the Hong Kong government controls all the land and individual buyers and companies can lease land for 50 years.
The government leases the land through a so-called tender process, where the highest bidder gets the lease.
This bidding process has resulted in the sky-high prices as developers bid hardly to get hold of land plots. Naturally, the developers need to increase property prices to make a profit.
Giving you an example, Sun Hung Kai Properties is a Hong Kong-based developer that acquired 131,000 square meters of residential land at Hong Kong’s old airport for USD 3.2 billion, making an all-time high record.
In the last few years, we’ve seen several major developers from Mainland China entering the Hong Kong market as well. These companies have pushed many traditional developers out of the market with their high bids, which has also resulted in increased real estate prices.
Hong Kong is one of the richest regions in the world with a GDP per capita of around USD 47,000.
There’s a big upper class with much money to invest. Combine this with a great influx of wealthy foreign investors, especially from Mainland China, and you probably get the equation.
High Rental Yields
Previously, foreign investors flocked to the Hong Kong market thanks to its high rental yields. But, rental yields are currently in decline and in September 2019, rental yields dropped to 2.4%, the lowest level in two decades:
- 2005 – 5.3%
- 2010 – 4%
- 2015 – 2.9%
- 2018 – 2.6%
- September 2019 – 2.4%
What can I expect from Hong Kong’s property market in 2020?
Major banks like Morgan Stanley and DBS predict that prices will fall by 10% until March 2020. DBS alone says that the market can fall as much as 20% to 30% in a worst-case scenario.
The main reasons why investments plunge are falling tourism and a weak retail sector, due to the ongoing protests. At the same time as the Hang Seng Index fell as much as 15% from April to November in 2019.
While Hong Kong has dropped in the Most-Favored Nations ranking done by PwC and an Urban Land Institute, nations and cities like Singapore, Ho Chi Minh City, and Tokyo thrives and snap the top three spots for 2020.
DBS also predicts that the supply of residential property will remain low in Hong Kong through 2020 to 2021, with around 19,000 new primary units built each year.
As the government aims to increase the supply of public housing, which is in great need in Hong Kong, developers won’t be able to buy as much land sold via government tender.
Instead, we will most likely see more activity in the secondary market as the government has eased mortgage regulations, making it easier for first-time buyers to acquire property. The interest rate is still low, which is a positive sign as well.
Even if Hong Kong currently faces problems due to political instability and a weakening economy, it opens up for long-term opportunities and the market can rebound once we see more political stability and a more positive economic climate.
Is buying property in Hong Kong a good investment?
Having some of the lowest yields in the region and the most overvalued property markets in the world, Hong Kong is not an optimal investment destination at the moment.
There are plenty of other cities in the region that offer higher yields and better investment opportunities.
There’s a reason why Hong Kong has dropped in rankings recently, giving space for places like Singapore, Ho Chi Minh City, and Tokyo.
The chance of a continuing downtrend is big when looking at historical data, the recent political unrest, ongoing trade war between China and the US, and its slowing economy.
That said, the market is resilient and prices haven’t dropped significantly. As late as 2018, the government issued a new stamp duty of 30% towards foreigners, but prices have remained stable and even increased.
Many believe that the biggest threat to the Hong Kong Market is the global trade war between the US and China, that Hong Kong’s economy highly relies on.
Hong Kong acts as a middleman in international trade, which makes it the most vulnerable economy, as the trade ties get worse.
Several real estate agencies and banks are predicting a 5% to 20% slump in the Hong Kong market by the end of 2020. The rental yields are also in decline, reaching an all-time low in the last two decades.
This may make Hong Kong an unattractive market for some investors. My answer to the question of whether Hong Kong is a good place for real estate investments in 2020 is still “No”.