In recent weeks, we’ve seen some positive calls being made on Hong Kong’s housing market, bucking from the consensus view for prices to fall in 2019. In almost all instances, the optimism is rooted on a recent uptick in sales in the primary market. Historically, housing price movements have shown a positive correlation with volumes (Figure 1).

Figure 1. Residential sales volume vs prices
Source: Land Registry, JLL

Analysis of historical data suggests that sales generally need to sustain above 5,700 transactions per month for prices to rise though this threshold has fallen to about 4,200 transactions per month in recent years. With the recent flurry of sales being underpinned by heavy discounting in the primary market, attempts to raise prices will quickly thwart any hint of a market recovery.

In our opinion, the biggest drag on market sentiment remains the uncertain outlook for the local economy with the festering trade dispute between the US and China and slowing growth of mainland corporates in the city making buyers more cautious. Whilst the unemployment rate remains anchored at 20-year lows, the backstop for the labour market in recent years, that was the mainland corporates, is now no longer there.

Recent talks have raised hopes that a truce between the US and China may avert a full-fledged trade war. Yet, none of the concessions made by China thus far have touched on US concerns around the protection of US intellectual property and alleged forced transfer of technology through joint ventures, claims that China vehemently denies.

With a quick resolution unlikely, we maintain our view for housing prices to continue their slide in 2019 and fall a further 10-15% after slipping 4.2% from their peak in 2018.

The greatest pressure remains on smaller units. These properties have posted the strongest gains in recent years and are the most exposed to the government’s plans to increase the delivery of subsided housing units. At the other end of the spectrum, prices in top-end of the market have been showing more resilience owing to the strong holding power of vendors. Indeed, our own data showed capital values of luxury residential properties increasing by 0.2% in the final quarter of 2018 compared to a dip of 3.8% in the mass residential market. The recent case of a buyer forfeiting their HKD 36 million deposit after backing out of an agreement to purchase a home on The Peak, however, has raised concerns that the luxury market may not be as immune from the market downturn as the latest quarterly data would suggest.

Still, the risk of a more significant correction remains dependent on the macro-economic environment and especially risks of a US recession. As noted in my previous blog, the US business cycle is now clearly in its latter stages of growth and carries a high chance of entering a recession within the next two years. Given that when the US economy sneezes, the Hong Kong property market has historically caught a cold, this would imply that the outlook for the local housing market remains overtly negative over the short-to-medium-term.

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