Hong Kong property market welcomes a turning point? UBS predicts that interest rate cuts will activate the market, and property prices are expected to bottom out and rebound

According to the Wisdom Finance APP, the withdrawal of the spiciness once stimulated the trading volume of the Hong Kong property market, but the effect was not long-lasting. Huang Jianye, Chairman of Meilian Group, pointed out that favorable factors for the property market are gradually emerging. Among the ten most important property market indicators, seven have improved compared to before the US interest rate hike, with only three indicators deteriorating. This reflects that the current property market sentiment is indeed more consolidated and healthy than before the interest rate hike. However, the US interest rate hike came quickly and urgently, coupled with the slow economic recovery in Hong Kong, the market sentiment is pessimistic, and Hong Kong people lack confidence in the economic outlook. They have slowed down their property purchase pace, shifting from storing wealth in properties to storing wealth in savings, offsetting the effect of the spiciness withdrawal.

If there is a rate cut in September, it is believed that it can boost confidence. However, if the rate cut is too late, the effectiveness will take time to ferment. Therefore, the forecast for the property market for the whole year has been lowered, with an expected drop in property prices of about 8%, returning to the mid-2016 level. The forecast for the full-year volume of first-hand transactions has also been lowered to around 16,000 units, and the second-hand transaction volume has been reduced to about 40,000 units, increasing by over 50% and about 12% respectively compared to the previous year, reaching a new high in three years.

Huang Jianye emphasized a long-term positive outlook for the property market. When interest rates drop and rents rise, returns can be increased. The brick-and-mortar culture is resurfacing. He suggested that the SAR government should take advantage of the interest rate reduction cycle to accelerate economic development and financial prosperity, shifting from attracting talent to retaining talent, lowering the threshold for obtaining permanent residency cards, and increasing incentives for professionals to stay in Hong Kong for development, thereby boosting the confidence of Hong Kong people.

Specifically, Huang Jianye pointed out that after the spiciness withdrawal, the transaction price and volume of residential properties rebounded, but since the second quarter, the transaction volume has been high at the beginning and low at the end, and property prices have softened immediately. The main reasons for offsetting the effect of the spiciness withdrawal are as follows:

1. Pessimism prevails, the market is filled with negative news, Hong Kong people lack confidence in the economic outlook, and both consumption and market entry intentions are weak, leading to a temporary suspension of property purchases or a shift from buying to renting, offsetting the positive effects of the withdrawal.

2. The US interest rate hike cycle was fast and urgent, with a total of 11 rate hikes from March 2022 to July last year, totaling 5.25%. Even though the interest rate has remained unchanged for 8 consecutive times afterwards, the interest rates in Hong Kong have risen to a relatively high level, affecting market entry intentions. According to the Mortgage Interest Rate Index (MMI) data from the Mortgage Referral Research Department in June this year, the MMI was 4.16%, exceeding the high level of 4% for 7 consecutive months. With interest rates at a relatively high level, market entry intentions are significantly affected.

3. A large amount of unsold new property inventory is accumulating, with developers focusing on quantity rather than price, putting downward pressure on property prices. According to the latest private residential first-hand market supply data released by the Housing Department, the number of completed but unsold (unsold new property inventory) units in the second quarter of this year reached 19,000, a decrease of 2,000 units compared to the previous quarter, but an increase of about 36% compared to the first quarter of 2022.

Huang Jianye believes that the prevailing pessimism has led to the neglect of positive fundamental factors. Although the Hong Kong economy has not yet returned to its peak, it has emerged from its darkest period. The unemployment rate remains extremely low; the peak of immigration has passed, and the Hong Kong population has stabilized. According to Immigration Department data, considering only the net inflow of permanent residents of Hong Kong through the airport, the net inflow turned positive for the first time in 2024; the labor force increased from 3.744 million from March to May 2022 to 3.826 million from May to July 2024, indicating that Hong Kong has gradually moved away from the bottom.

The Hong Kong property market is facing a similar situation. Drawing a line between before and after the US interest rate hike, analyzing the ten most important property market indicators, it can be seen that as many as seven indicators have shown significant improvement, with only three showing no improvement Among the improving indicators, the number of households with a monthly income of over HKD 100,000, the amount of Hong Kong time deposits, and the proportion of mainland buyers have all reached historic highs. This reflects that the current property market is indeed more solid and healthy compared to before the interest rate hike, with conditions for a halt in the decline and a rebound.

Due to the lack of confidence in the economic outlook among citizens, there is hesitation in entering the market. Although the fundamental factors of the property market have improved, they have not been able to attract more buyers to enter the market. This has resulted in property transactions not being able to maintain the high levels seen at the beginning of the cooling measures, and even falling to new lows after the cooling measures. Based on first-hand residential property sales information and market news, the number of first-hand transactions in the first 25 days of August was only about 430, with an estimated total of about 500 for the month, setting a new low for a single month after the cooling measures.

In terms of property prices, they continue to seek a bottom, with declines exceeding the expected levels, leading to oversold conditions. The latest U.S. property price index stands at 130.36 points, falling for 10 consecutive weeks, with a year-to-date decline of 5.23%, hitting an 8-year low. Wong Kin Yip pointed out that even with social movements, outbreaks of epidemics, and border closures, property prices have only experienced slight fluctuations. It was only when the U.S. significantly raised interest rates that property prices worsened. The latest property prices have fallen by nearly 27% from their record highs, reflecting the significant impact of the lack of confidence in the outlook and persistently high interest rates on the property market.

It is worth noting that among the top ten property market indicators, the latest amount of Hong Kong time deposits has surged to HKD 9.9 trillion, an increase of 80% from before the U.S. interest rate hike. Wong Kin Yip believes that this indicator not only reflects the wealth of Hong Kong people but also indicates a change in investment mentality. Due to high interest rates and a lack of confidence in the economic outlook, a conservative investment strategy has been adopted, shifting from investing in property to investing in interest, locking funds in time deposits, which is another reason for the stagnation of the property market.

Wong Kin Yip believes that a rate cut will be another turning point for the property market, boosting confidence among Hong Kong people. The market anticipates a rate cut in the U.S. in September, with some analysts suggesting that the rate cut for the whole year could reach 0.5% or even higher. It is expected that when the rate cut is announced, developers will accelerate their property launches, improving market sentiment. Some funds may enter the market ahead of the rebound in property prices, activating property transactions in the fourth quarter to surpass those in July and August, with the potential for narrowing price declines.

However, due to the profound impact of the interest rate hike and the delayed rate cut, it is believed that property prices will continue to adjust downwards before the rate cut. Even if the U.S. cuts interest rates, Hong Kong may not necessarily follow suit in real time. Property prices are unlikely to rebound immediately, and transactions may not recover to the levels seen in March. Therefore, the annual property market forecast is adjusted, with property prices expected to fall by about 8% for the year, returning to mid-2016 levels. In terms of transactions, as the rate cut is postponed until September, the forecast for the annual number of first-hand transactions is revised down to 16,000, still up by over 50% year-on-year. The forecast for the annual number of second-hand transactions is also revised down to 40,000, up by 12% year-on-year. Despite the downward adjustment in transaction forecasts, both first-hand and second-hand transactions are expected to rebound, reaching a new high in three years, indicating that the property market has moved away from its worst times. Wong Kin Yip is particularly optimistic about the rental increase, expecting it to rise by about 8% for the year, outperforming the broader market and reaching a historic high.

Wong Kin Yip believes that with the improvement in key property market indicators and the return of the rate cut cycle, property prices are believed to be very close to bottoming out and rebounding. Looking ahead, he is optimistic about the development of the Hong Kong property market. With rents continuing to rise, pushing up rental yields in recent years, the Rating and Valuation Department's Class A private residential rental yield has risen to a new 11-and-a-half-year high. If interest rates fall in the future, fixed deposit rates will also follow suit, making the rising rental yields even more attractive. This is expected to increase the desire of long-term investors to buy properties for rental income, as long as the Hong Kong economy continues to develop steadily, with some fixed deposits flowing into the property market At present, Hong Kong property prices are considered to be oversold, with a decline exceeding the appropriate level. It is expected to attract capital inflows, leading to a strong rebound in the property market and gradually returning the transaction volume to a positive trajectory. It is believed that the current wealth-hiding nature is only temporary. Once interest rates fall and rents rise, the investment value of properties will be highlighted again, and the culture of hiding wealth in properties will resurface.

Another reason for optimism about the future market is that the supply and demand of the Hong Kong property market has gradually returned to balance. In terms of supply, although the Rating and Valuation Department expects the completion volume to exceed 22,000 and 25,000 units in the next two years, the quantity is estimated to drop significantly to an average of about 16,300 units per year in the following 3 years (2026 to 2028). More importantly, the property market sentiment has calmed in recent years, with many developers holding a significant amount of unsold inventory, leading to a decrease in land acquisition intentions. Coupled with the limited residential land supply, only 30% of the units that can be built from land sales in the first half of the fiscal year meet the annual target. If the situation of limited land sales continues, it will affect long-term supply, and the completion volume in the coming years is expected to see a significant decline.

As for demand, with the end of the immigration wave and even some returning immigrants, Hong Kong's population is believed to gradually regain growth momentum. According to data from the government's Census and Statistics Department, the latest population in mid-2024 is approximately 7.53 million, representing an increase of about 1.8% compared to the end of 2021.

The continuous influx of talents brings new momentum to the property market. According to government data, the total number of talents and dependents entering Hong Kong through various talent immigration schemes in the first half of 2023 to 2024 has exceeded 250,000, bringing additional demand for housing in Hong Kong. Among these talents, high-level talents mainly engage in management and professional work, with a median income of about HKD 50,000. About 25% of high-level talents earn HKD 100,000 or more per month, and 10% earn HKD 200,000 or more, enjoying favorable economic conditions. Initially, talents tend to rent properties, but if interest rates decrease in the future and stamp duty is aligned with that of Hong Kong residents, it is expected to attract them to switch from renting to buying. With 250,000 people coming to Hong Kong, roughly equivalent to 80,000 households, if 20% of them purchase properties, it is almost equivalent to the annual transaction volume of new properties; if 30% choose to stay and develop in Hong Kong, it is sufficient to absorb the current unsold inventory.

Mainland Chinese buyers have become an important driving force in the Hong Kong property market. According to analysis based on known buyer names, mainland Chinese buyers (identified by the English spelling of their names) accounted for approximately 25.3% of the total registered volume of individual buyers in the Hong Kong property market for both primary and secondary residential properties in the second quarter of this year, a significant increase of 16 percentage points from about 9.3% in the first quarter of 2022, and even reaching a record quarterly high.

Wong Kin-yip also pointed out that the rise and fall of the property market still depends on the public's confidence in the future. Therefore, it is recommended that the government take advantage of the interest rate reduction cycle to attract capital inflows, accelerate economic development, promote financial growth, encourage banks to loosen credit, and propose specific measures to attract business expansion and foreign investment in Hong Kong. While integrating into the Greater Bay Area, Hong Kong should also act as the locomotive of the Greater Bay Area, leading the development of cities within the region. In recent years, the rapid economic development of domestic cities, such as Shenzhen, which is close to Hong Kong, has shown a trend of catching up in areas such as food, services, and tourism, attracting many Hong Kong residents to travel north for consumption. This trend is worth emulating by the SAR government and local businesses. In addition, as talent attraction measures have proven effective in attracting many talents to Hong Kong, it is time to transition from attracting talents to retaining talents. Measures to retain talents should be introduced promptly, such as reducing the period threshold for obtaining permanent residency from the current 7 years to 5 years, or even 3 years, to increase their incentive to stay and develop in Hong Kong