Elevated mortgage rates hurt affordability

• Primary market sales volume declined sharply in October and November to 672 and 365 units, respectively. Primary projects have launched at a slower pace, and among those launched in 4Q22, most of them recorded weak sales performance. ‘Bondlane I’ in Cheung Sha Wan sold 7 out of 30 units, and ‘CHILL RESIDENCE’ in Yau Tong sold only 10 out of 128 units on the first day of project launch.
• While transaction volumes hit a record low in 2022, the residential market may see a rebound in activity in 2023, as the reopening in mainland China and Hong Kong improves the economic outlook and strengthens investors’ confidence. However, mortgage rates are expected to rise further and stay elevated in 2023, deterring home buyers from entering the market.

Private housing land supply exceeds annual target by 25%

• The government announced that private housing land supply in the fourth quarter of FY2022-23, including a residential site (TWTL 427) in Tsuen Wan and eight lease modifications, would yield around 3,120 units. The total private housing land supply of FY2022-23 is expected to support the development of about 16,070 units, exceeding the annual target of 12,900 units by 25%.
• In 3Q22, the number of occupation permits issued for luxury units declined to 55 units, from 228 units in 2Q22. This includes 36 units at 8 Tsing Ha Lane in Tuen Mun and 16 units at 23 Po Shan Road in Mid-Levels.

Transaction volume drops further in 4Q22

• Due to subdued demand for luxury housing and rising vacancy, landlords had been offering competitive discounts and extra rent-free periods to seal deals. Rental values dropped by 1.8% q-o-q in 4Q22, which led to a full-year drop of 2.7%. 
• Luxury residential transaction volume dropped 65% in 2022 to the lowest level in nine years. Among notable luxury sales transactions in the quarter, a house at ‘Mont Rouge’ in Shep Kip Mei was sold for HKD 508.0 million (HKD 70,841 per sq ft, SA). Luxury capital values declined by 2.2% q-o-q in 4Q22, a drop of 0.9% compared to the previous quarter.

Outlook: Home prices to drop further in 1Q23

• The elevated mortgage rates and large volume of units pending for sale will likely continue to put pressure on prices. With the Buyer’s Stamp Duty and China’s foreign exchange controls still in place, southbound capital flows will likely be limited in the near term. Luxury residential capital values are forecast to fall by 5%-10% in 2023 if cooling measures remain.
• Reopening the border with mainland China should result in an inflow, boosting residential demand. Also, as businesses return to normalcy, relocations should bring back expatriate demand in the luxury rental market. However, these positive factors are offset by the ample supply of luxury units and the current high vacancy rate. Luxury rental values are forecast to fall by up to 5% in 2023.