We need to talk about Hong Kong’s property market. Again.

December 3, 2015

Fireworks with the word "Win" explode over Victoria Harbour to celebrate the Chinese Lunar New Year in Hong KongWill 2016 be the year when the seemingly bullet-proof Hong Kong real estate market finally cracks?

As the year draws to an end, it appears analysts are trying to outdo each other on how grim they can get about forecasts for Hong Kong’s property market.

Each year, it gets more dramatic.

And each year, the prognostications turn out to be wrong. But the recent slowdown in the market has brought the bears out again. The latest data from Hong Kong’s Land Registry shows sales of registered residential units in November slumped to their lowest in nearly two decades.

HK home prices

UBS threw the cat among the pigeons last month, calling for home prices to fall more than a quarter over the next two years as what it calls a new era for Hong Kong gets underway. All the headwinds that have supported the doubling of home prices since the global financial crisis – low interest rates, liquidity, job market conditions and the Hong Kong dollar’s relative strength – may be at risk of reversing.

Residential mortgage approvals fell 40 percent in October. This was blamed on fears that rates were soon going to go up. Indeed, it is looking increasingly likely that the U.S. Federal Reserve finally lifts interest rates for the first time in nearly a decade later this month. The Hong Kong dollar’s peg to the U.S. dollar means the city’s monetary policy simply follows the Fed.

HK stocks vs mortgages

The second major factor, and arguably the more important one in the short term, is what is happening on the mainland. China’s marked slowdown has taken a toll on everything from property transactions to tourist arrivals and retail sales in Hong Kong.

Chinese tourists buying up everything from Louis Vutton bags to milk powder in Hong Kong’s shops accounted for nearly half of the city’s retail sales last year. This is slowing sharply as the economy slows and as Chinese tourists prefer to take their shopping to Korea and Japan instead. The knock-on impact is putting rents in shopping malls at risk.

The backdrop appears anything but sanguine.

But Macquarie takes a calmer view. It estimates that there is a decade worth of pent up demand (roughly amounting to 262K households) in Hong Kong that has built up as buyers got increasingly priced out of the property market. Unless there are widespread job losses it is unlikely that this demand will disappear.

If they’re right, that suggests every dip is likely to find buyers come back in even if interest rate slowly nudge higher.

Dents in the armour are showing. But 2016 may still be too early for the start of the collapse.

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