Hong Kong's current political crisis and economic uncertainty could make almost anyone despair for the future of the property market in this Special Administrative Region of China. But Georg Chmiel, Executive Chairman of Juwai.com, believes things are less serious than they seem.
Mr. Chmiel said, "First, a bit of context. 2018 was a boom year for Hong Kong's residential real estate market. The city once again earned the title of "world's most overvalued housing market." That is because average prices are so high relative to average income.
"Now, in 2019, the market is taking a hit from the trade war and protests. Transaction numbers are falling, prices have stopped climbing, and the number of mainland Chinese buyers seeking property has dropped by 20 per cent.
"Transactions in the secondary market are down sharply, especially for luxury homes. At least two wealthy buyers have had second thoughts to such a degree that they forfeited the large deposits they had already paid. One buyer gave up a deposit of $600,000 (AU$892,000) to get out of a purchase. Another forfeited $255,000 (AU$379,000).
"Across all price ranges, monthly residential sales volumes are down 21 per cent. Buyers are sitting on their hands. At Juwai.com, we believe that buyers are still eager to purchase. They are not holding back because they have lost interest. Instead, they are waiting to see if the trouble leads to bargains.
"As for prices, Hong Kong residential prices dropped for the first time in 2019. But they only fell 0.8% month on month in June, according to data from Knight Frank. Few analysts think prices will drop very far. The most negative forecast is for prices to fall by 10 per cent, but most analysts believe a single-digit drop is most likely.
"Indeed, the consensus is for the current market slowdown to be short-term. I won't speculate here on the politics of a solution to Hong Kong's crisis, but like many, I am confident a solution will be found. Once the crisis is past, the market will begin to recover.
"There is a precedent for this forecast. The market quickly rebounded after the 2014 protests in Hong Kong.
"Among the further reasons to be optimistic is the overwhelming housing supply shortage, which is the cause of the city's notorious unaffordability. The deficit will total about 38,000 units over the next six years by one estimate. That puts a floor under potential price falls.
"After a decade of historically low interest rates, consumers in some countries have amassed unprecedented levels of household debt. In once-prudent Canada, consumers have binged on home equity lines of credit and mortgages. That has pushed household debt to more than 100 per cent of GDP.
"Consumers in Hong Kong, by contrast, have not pushed debt to the same levels. Household debt in Hong Kong was 72 per cent of GDP at the end of 2018.
"Press reports suggest that the Hong Kong government will make more land available for public housing in the coming 12 months. That would result in less construction of new market units, which could help support prices.
"Overall, we think the protests and economic slowdown will hold demand down over the next twelve months and cut prices in the range of about 5 per cent. In the luxury market, prices should remain relatively stable in an environment of low activity.
"Over the long-term, the ultimate risk is for Hong Kong to lose its position as a critical hub for international finance, according to Patrick Wong at Bloomberg Intelligence. At Juwaicom, we are confident that will not happen. As I have written in other articles, no other city in China or Asia has the combination of factors that make Hong Kong special."