Hong Kong is famously known for being one of the easiest and best places to do business. Income and corporate taxes are among the lowest in the world and you can set up a company within days.
Not to forget, the market is transparent and closely regulated. Hong Kong will always be a preferred destination for real estate buyers.
Foreign property investors, mainly from Mainland China, have poured in the past years and the property market is one of the hottest and most frequently mentioned in the local and foreign media.
In this article, I explain how Hong Kong’s property market has performed the past years, what’s driving the market, and what my predictions are for the market in 2019.
Hong Kong’s property market in 2017 & 2018: A throwback
Hong Kong’s property market is one of the hottest and real estate is among the most expensive in the world, outperforming places like Singapore and Sydney.
Prices have increased by double digits and 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.
Nowadays, you can buy a 10 bedroom house in several European countries, for the same price as a 28 square meter apartment in Hong Kong. And the average price per square meter in Ho Chi Minh City is 14% of that in Hong Kong, which is quite astonishing.
Looking at real price levels, the average price per square meter was HKD 23,336 (USD 2,985) in September 2018, a year-on-year increase of 16.6% compared to September 2017.
We can see that even if the government has introduced stricter regulations toward foreign buyers, the market just continues to move upwards.
Prices have grown strongly for over a decade, except for a brief slump in 2016 due to the mortgage rate hike. The Centa-City Leading Index CCL has an interesting graph showing the price increases from 1996 – August 2017.
This has resulted in a situaton where the government has seen no other solution than to introduce regulatory changes. At the same time, many Hong Kongers turn their eyes to real estate markets overseas and places like Bangkok, Osaka, and Ho Chi Minh City.
Why is Hong Kong property so expensive?
Hong Kong is an attractive spot for both foreign and local investors.
Often called the crown jewel of Asia, you can enjoy some of the lowest tax rates in the world and a number of other benefits.
Below I listed the main reasons why property is so expensive in Hong Kong at the moment.
1. Hong Kong lacks space and has a high demand of real estate
At the same time as the supply and availability of land area is scarce, Hong Kong has experienced a big demand of 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 has a chart showing the world’s most densely populated countries and territories, with Hong Kong on a fourth place.
2. Property developers need to bid hard to acquire land
As explained in my separate guide about buying property in Hong Kong, the Hong Kong government controls all the land, 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 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 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.
3. Hong Kong attracts wealthy investors
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.
4. Hong Kong used to offer high rental yields
Foreign investors have flocked to the Hong Kong market thanks to high rental yields. But rental yields are currently in decline, in the end of the first half of 2018, rental yields dropped to 2.6%, the lowest level in two decades:
- 2005 – 5.3%
- 2010 – 4%
- 2015 – 2.9%
- 2018 – 2.6%
Hong Kong property market data from 2018
Below you can find interesting information and data related to the market performance in 2018.
- The supply of residential units increased by 12% in 2018, compared to 2017
- The luxury residential rents increased by 4% in 2018
- The number of year-on-year transactions increased by 5.6% in the second quarter of 2018, which shows that the demand is still high. At the same time, the average sales value per transaction increased by 8.4% according to Colliers
What can I expect from the market in 2019?
With prices reaching new heights, there’s a risk that the market will slow down, or even crash by 10-15% in 2019. Lee Shu-Kam at Shue Yan University told SCMP that the market can crash by as much as 10% in the first quarter of 2019.
We also see a looming deflation due to the constant increase, and many analysts see the escalating trade war between the US and China as a great risk to the property market.
The UBS Global Wealth Management claims that the Hong Kong market is one of the most overvalued and at great risk of being in a property bubble. The UBS Global Real Estate Bubble Index backs this fact as Hong Kong tops the list of 20 cities, which can be seen on SCMP’s website.
The Hong Kong government takes several steps to slow down the market and price growth, to cool down the market and make properties affordable for locals.
Changed regulations in Hong Kong’s real estate market as of 2018
- Down payments are set to 50% for luxury apartments, which means that you need to pay at least 50% up front
- There’s a new hefty stamp duty of 30% towards foreign buyers
- A new vacancy tax towards investors and developers that keep apartments vacant for more than 6 months, to stop buyers from hoarding apartments
These steps had little effect on the market whatsoever…
Can Hong Kong’s property market continue to increase?
We’ve seen that Hong Kong’s property market has increased immensely over the last decade, and is in a bubbly phase according to UBS. Even if this is the case, Hong Kong has a number of benefits that can’t be found elsewhere in this world.
Below I’ve listed a number of reasons that can speak for a continuous increase in prices.
1. Mainland Chinese investors use Hong Kong to store cash assets
Investors from cities like Beijing, Shenzhen and Shanghai find Hong Kong as the best option for real estate investments.
Here, they can store money outside of Mainland China and in Hong Kong dollars, which is pegged to the US dollar, and considered more safe compared to the Chinese Yuan.
The influx of Chinese investors is not slowing down, hence keeping the demand of property high. Colliers has predicted a 5-10% price increase per year, for the coming five years, while Cathie Chung, the National Director of Research at JLL, predicts a 5% price growth in 2019.
We can see that there are counter opinions as well, still, most market analysts believe that prices will drop in 2019.
2. The impact of increased mortgage rates in Hong Kong
After the rate hike by the US Federal Reserves, the banks in Hong Kong like HSBC, Hang Seng Bank, and Bank of China (Hong Kong) also raised their mortgage rates by 10 basis points in August 2018.
To understand the impact of this rate hike, we have to look at historical data.
What happened when banks in Hong Kong raised the rate back in 2015?
Property prices declined by 13% within six months. There’s a good probability that we can see a similar decline again.
Is buying property in Hong Kong a good investment in 2019?
It’s hard to predict as the Hong Kong market behave differently from other markets. The chances of a slump in prices is big when looking at historical data and the introduction of new regulations.
Still, the demand is high. The new stamp duty of 30% had little affect on foreign investors, real estate is still among the most expensive in the world.
How will the trade war between US and China affect Hong Kong’s property market?
Many believe that the biggest threat to the Hong Kong Market is the global trade war between the US and China. We should remember that Hong Kong’s economy highly rely on Mainland China’s economy.
Hong Kong acts as a middleman in international trade, which makes it the most vulnerable economy, as the trade ties get worse. The trade war will impact the real estate investments from Mainland China, sooner or later.
With both the US and China set to escalate the trade war, it’s the biggest external threat that can cause a big slump in prices.
For the same reasons, several real estate agencies and banks predict a 5-15% slump in the Hong Kong market by the end of 2019.
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 whether Hong Kong is a good place for real estate investments in 2019 is “No”.