How much further will Hong Kong home prices slump?

In 2022, Hong Kong's private housing market experienced the biggest downturn since the Global Financial Crisis of 2009, with mass residential capital values dropping by more than 10%. The expectation for extended interest rate hikes weakened market confidence. The million-dollar question is, how much further will home prices fall? We believe that, although a prolonged period of price correction is possible, the rate of decline could be milder in 2023. 

Figure 1: Transaction Volumes and Mass Residential Capital Values between 2020 and 2022

Source: Land Registry, JLL

The residential market may have already factored-in most of the downside risks from the last six US rate hikes, and some market participants may have exhibited overreactions. Although the rising mortgage rate directly affects home buyers' affordability, there are other factors that may affect home prices. For example, during the last rate hike cycle, while HKD short-term interest rate (HIBOR) increased by 200 bps from 2015 to 2018, the mass residential capital values surged by 24.8%. Similarly, in the current rate hike cycle, while SGD short-term interest rate (SIBOR) rose by 240 bps from March to September 2022, Singapore's private residential property price index has increased by 7.3%, according to the Urban Redevelopment Authority of Singapore.

Net population movement is another key determinant of home prices. From June 2021 to June 2022, net population outflow hit a record high of 95,000. As the relatively mobile portion of Hong Kong’s population may have already left, the outflow will likely slow down starting next year. In 3Q22, the number of BNO visa applications dropped to 10,100, representing the smallest number of applications since UK launched this programme. On the other hand, the inflow of one-way permit holders from Mainland China, albeit still below the pre-pandemic level, has risen steadily since 2021. We expect the talent attraction schemes and normalised travel to bring the inflow of one-way permit holders from Mainland China above 30,000 in 1H23, compared to 18,300 in 1H22.

Figure 2: Number of BNO Applications since 2021

Source: Census and Statistics Department

Figure 3: Hong Kong Net Population Movement between 2012 and 2022

Source: UK Home Office

In recent months, Hong Kong home buyers have taken a wait-and-see approach amidst looming uncertainties, and the primary home sales volume dropped by 32% up to October 2022. Demand from first-time home buyers and the need for home upgrades were delayed and will be unleashed as projects are launched at favourable prices. Also, plenty of cash-rich investors will continue to bargain hunt in the housing market. However, the near-term supply may exert pressure on prices because of the intense competition among new project launches and unsold units of completed projects, which have piled up for four straight quarters. Based on the average monthly primary sales volume this year, it will take around 1.5 years for the market to digest the stock.

Given the cooling measures in place, the government still has room to stabilise the housing market. Also, lower-than-expected US inflation and the recent relaxation of quarantine measures in Mainland China have injected some long-awaited confidence into the market. As a full-scale reopening in Hong Kong and the stabilising external environment is gradually underway, the economic recovery may support housing demand and ease the pace of home price correction.