UBS Intellectual Capital Hong Kong Real Estate At Risk of a Correction

 

06 Oct 2017

The housing market in Hong Kong is at risk of a bubble. Prices for small dwellings increased by more than 20% in the last four quarters, more than offsetting previous losses. At the same time, unabated investor demand and firmly entrenched optimistic expectations are keeping prices from dropping in the short term, despite the city featuring the worst housing affordability of all global financial centers.

Residential market prices reached an all-time high in midyear, and prices – especially for smaller dwellings – surged in the last four quarters. In real terms, they are close to three times higher than in 2003, having increased at an average annual growth rate of 10%. Real rents rose in the same period by 3%, while incomes were unchanged. In fact, real incomes have virtually stagnated in Hong Kong for many years, and the average living space per person amounts to only 150 square feet.

The latest housing market boom stemmed from strong investor demand, general positive sentiment and the “fear of missing out” on capital gains. This is reflected as well in a frozen secondary market in which people hold on to their properties, expecting prices to rise further.

But rising house prices may take a break. Although a major house price correction seems unlikely at the moment, a mild correction of a single-digit percentage seems possible in light of rising supply and developers’ eagerness to achieve a high completed sales rate for new properties. Property prices remain driven by the appeal of the residential market to local and foreign investors alike.

Nevertheless, prudence is warranted. The market’s dependence on sentiment makes the long-term outlook highly uncertain.

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