The longest bull run ever in Hong Kong, currently the most expensive place on the planet to buy a home, has come to an end.
It's likely to be a tough year or two ahead for property owners, particularly for those looking to sell. There has been blood in the streets, literally, and we all know that means a buying opportunity for anyone forced to sell.
I know this much: I have a rental property on the market at the moment. It's a bit of a half-hearted effort to sell it. I'd just like to recognize the gains and reposition some of the cash. But since listing it in October, the number of inquiries is nil. So for now, I'll sit tight.
Property prices turned south in the second half of the year as protests intensified. Mass residential property prices still recorded a 1.3% gain for the full year thanks to a strong start, according to the brokerage Jones Lang LaSalle (JLL). But they are now staring at a decline of 10% to 15% in 2020.
"We believe the market sentiment will remain tied to social tensions in 2020," Joseph Tsang, the chairman and head of capital markets at JLL in Hong Kong, says in his forecast.
Luxury residential prices may fare even worse. JLL predicts a drop of 20% or more in capital values for luxury property in 2020. High-end homes have been more closely linked with the economic slowdown in China and Hong Kong produced by the U.S.-China trade war, which dramatically knocked down business sentiment in China the last two years.
The main property developer stocks to watch if there is a prolonged downturn are Sun Hung Kai Properties (SUHJY) ; New World Development (NDVLY) ; CK Asset Holdings (the former Cheung Kong) (CNGKY) ; Henderson Land (HLDCY) ; and Sino Land (SNLAY) .
"Developers will face increasing pressure in pricing in order to offload stock due to the introduction of the vacancy tax and the increase in housing supply," JLL's Tsang notes, with the Hong Kong government starting to tax new flats if they are completed and left vacant.
The pro-democracy protests that started this spring have no doubt dampened the spirits of the man and woman in the street. But that's also temporary. Hong Kong is a remarkably resilient market. After the financial crisis broke out in the West in 2007, we had a period of about a quarter where there was no movement in the property market. Then it began its way up again. I had my home on the market back then and finally got the price I wanted.
The same brief dip happened when the dot.com bubble burst, feeding into a recession that fed into the SARS epidemic in 2003. Expatriates were sending their families home and some were fleeing themselves. But after a short-lived panic, it transpired that the short downturn was an excellent buying opportunity.
Protests change the game
Has anything intrinsic changed with Hong Kong's property market now, where a population of 7.4 million packs into skyscraper apartment blocks? Perhaps. Buyers from mainland China were extremely active in Hong Kong during this past bull run, at times accounting for as much as one-third of new-home sales. That interest has dissipated as tear gas has wafted through the streets.
"Regular" mainland buyers may be put off Hong Kong as an option to move or a place to park a bit of cash in a second home because there has been an anti-mainland sentiment to the protests. It has rarely made itself evident at a personal level, but Cantonese-speaking Hong Kongers are standing up for their culture and identity against Mandarin-speaking mainlanders. As the Communist Party tightens its chokehold on Hong Kong's freedoms and institutions, the number of the city's residents who identify themselves as "Chinese" is at a record low, and many say they prefer to be known simply as "Hong Kongers."
So we may see rank-and-file purchases of Hong Kong apartments by mainland citizens decline for a while. The mainland influence has waned, anyway, after Hong Kong put in place special stamp duties and taxes that apply to all non-permanent residents if they want to buy and sell; these were measures taken to cool the red-hot property market.
At the high end, Hong Kong will still be the first place that rich mainland citizens seek out for a pied-à-terre. It is a place that is familiar, close by, but largely (in terms of currency, anyway) out of the clutches of the Communists. Now that there is some uneasy peace and a kind of truce in the trade war, business conditions in China may pick back up again, which would make wealthy Chinese more confident in their purchases.
Almost any wealthy businessperson could be charged with bribery or crimes against the party should they fall out of favor. If the politician with whom they have the closest ties goes down, they go down, too. So getting money out of mainland China is a priority, and Hong Kong is still a city where you can walk a briefcase of cash across the border and deposit it into a bank with few questions asked.
Hong Kong is the least affordable place in the world to buy a home, according to the statisticians at Demographia. It yet again topped their 2019 survey of home affordability around the world, with the dubious distinction of having home prices that are 20.9 times the median income. At the other end of the extreme, it'll set you back only 2.6 times your annual wages to buy a home in Pittsburgh or in Rochester, N.Y.
Hong Kong is also the most expensive place on the planet for expatriates to work, according to a separate piece of research from Mercer. High rents and a Hong Kong dollar that is pegged to its U.S. counterpart explain most of its position in that assessment, with Tokyo, Singapore and Seoul next in line.
Hong Kong occasionally sets records per square foot for the raw price of real estate as well. The World Economic Forum also puts it atop the pinnacle of expensive places to buy a home, with the average homeowner paying a monthly mortgage of almost US$8,000 and a
"skilled service worker" requiring 22 times his or her annual salary to afford a 650-square-foot pad.
It is these sky-high home prices for sky-high apartment blocks that are part of the root cause of this summer's tumult in Hong Kong. Young people graduating now feel frustrated by their lack of prospects, exacerbated by the inflow of highly skilled, often overseas-educated mainland Chinese professionals in high-income jobs.
So it's probably a positive that property prices are set for a down year or two. Society often somehow finds a way to correct its excesses. Maybe the tension that has led some Hong Kongers to pursue a "scorched earth" policy in Hong Kong - we'll destroy it so the Communists can't have it - was always inevitably going to lead to a home-price downturn, somehow.