Monetary easing to cushion the fall in Hong Kong residential prices

The monetary response to the COVID-19 outbreak is likely to ease the downward pressure on housing prices due to a soft economy.

August 10, 2020

According to JLL, Hong Kong’s commercial property investment markets recorded the sharpest correction in the first half of this year since the global financial crisis in 2008-9. During the same period, mass housing prices were slightly bumpy, yet recorded an overall 2.2% increase; reflecting resilient residential prices, albeit a drop in market activity. Meanwhile, luxury housing prices recorded a drop of 3.6%.

The robust demand in the city helped to buoy mass residential capital values. In 2020, the typical post-Chinese New Year seasonal sales recovery was pushed back to the second quarter as developers avoided launching new projects amid virus concern. Soon as the prohibition on group gathering was lifted and developers started to launch projects, market sentiment and sales velocity rebounded. For example, ‘OMA by the sea’, achieved a first-day sales rate of about 80%, out of the 268 units launched, reflecting solid demand in the market.

In the high-end segment, the investment market saw a quarterly average of 561 residential units worth over HKD 20 million that changed hands in the first half, compared to an average of 710 per quarter in 2019. Stronger buying sentiment was observed in 2Q20, with an apartment unit at ‘Dukes Place’ in Jardine’s Lookout, selling for HKD 222.1 million or HKD 78,000 per sq ft of saleable area. It was the highest unit price recorded at the development since its launch in 2019. Meanwhile, a villa at ‘Mont Rouge’ on Beacon Hill was sold for HKD 370 million or HKD 71,873 per sq ft of saleable area. These transactions reflect that some cash-rich buyers were still paying a premium for their rare assets, albeit the uncertain economic outlook. Yet, total transaction volumes are considered very limited, compared to historical levels.

The resilience in housing prices might be partly due to the massive monetary easing in most geographies. According to JLL, capital values of mass residential properties have risen by 208% from 4Q08 to 3Q18. This uptrend coincided with quantitative easing since the Global Financial Crisis, which contributed to prolonged low-interest rates and increased attractiveness of property investment due to asset value inflation.

Figure 1: Mass residential Capital vs. Average Mortgage Rate

Source: Market Sources JLL

Given the experience in the past decade, the monetary response to COVID-19 is likely to ease the downward pressure on asset values due to a soft economy. Housing properties, as an investment asset, are likely to benefit from the loose monetary environment. However, home prices are unlikely to grow at rates seen after the 2008/9 financial crisis because of the pandemic. A contracting economy, rising unemployment, local political incidents and tightened capital control from mainland China could offset the positive impact of loose liquidity. Over the near term, we continue to hold a negative view and forecast mass housing prices to drop by 5-10% while luxury housing prices to fall by 10-15% in 2020.