Share

January 17, 2017

Minimum 40 percent down payment helps Hong Kong owners escape downward price pressure despite rate hikes.

Hong Kong’s residential property market looks set to brush off recent rate hikes, at least in the short-term. The final two months of 2016 brought with them an increase of 25 basis points to the U.S. Federal Reserve’s benchmark interest rate, a similar increase in the Hong Kong Monetary Authority’s base rate to 1 percent, and the imposition of a 15 percentflat rate in Hong Kong government stamp duty. Nonetheless, JLL does not expect these measures will be enough to lead to a broad based correction in residential prices.

Although prices may soften over the near term, JLL is forecasting capital values to rise by up to 5 percent in 2017, with luxury properties outperforming mass residential. That figure is higher than 2016’s full-year growth rate of 2.4 percent in the mass market.

Joseph Tsang, JLL Hong Kong’s Managing Director, attributes the market’s resilience to “strong pent-up demand among first-time buyers, the large number of cash-rich buyers in the market—including mainland Chinese buyers—and still low mortgage rates.”

Interest rates and mortgage lending rates would have to rise significantly, and the loan-to-value ratio would need to be cut further, before owners come under pressure to sell their properties at lower prices against a backdrop of tight housing supply. Banks have already been offering mortgage cash rebates of up to 1.4 percent on total mortgage loans; and a reduced number of transactions, particularly in the secondary market, may press banks to lower their mortgage rates further to capture market share.

“The recent rate hike by the U.S. Federal Reserve is unlikely to have a significant impact on housing prices in Hong Kong because local banks have limited room to raise their lending rates amid stiff competition. In fact, we are already seeing this with a number of banks adjusting spreads to lower mortgage rates,” says Denis Ma, JLL’s Head of Hong Kong Research. “Rising interest rates will eventually weigh on property prices, but only later on in the cycle.”

The primary market is expected to continue to drive momentum in property transactions as “developers are forced to offer purchasers stamp duty rebates in order to entice them to buy their properties,” Tsang adds. Some developers might also have to provide financing, meaning they will also have to act as a bank by lending money to the purchaser.

“Considering all these subsidies, costs for developers could be very high, so they may offset the impact by putting up the price of finished units,” he explains.

JLL expects more launches of completed flats to surface at the start of 2017 given developers’ growing pipeline of projects and their need to meet sales targets. “Sales momentum should pick up, especially as developers use incentives to override the 15 percent rate move,” says Ingrid Cheh, Senior Manager with JLL’s Hong Kong Research team. “Once developers regain confidence in their sales strategies and buyers grow accustomed to the new measures we should see more flats being put back onto the market for sale.”

Areas undergoing major infrastructure improvements are expected to garner the most interest from potential buyers. “Given the supply and demand imbalance, and the pre-sale nature of many new launches, we believe there should be strong demand for residential flats in Kai Tak,” says Cheh. “The opening of the Shatin-Central railway line should coincide with the completion of the bulk of the supply in the area.”

With double stamp duty not applicable to first-time buyers, families with children or other members who don’t already own a home may use them to snap up more than one flat in one go, taking advantage of a loophole that allows the acquisition of multiple properties under a single sales and purchase agreement. Another leg up onto the property ladder for first-time buyers comes from developers, who plan to build a greater number of smaller units in the price range of HKD3-5 million, in response to the government’s target of supplying 180,000 private flats in the 10 years to 2025.

Overall however, JLL anticipates the total number of residential property sales will decrease substantially over the near-term, to below the average monthly level recorded in 2016. With a new Chief Executive due to be appointed in March, it is also possible that the government’s measures to take the heat out of the Hong Kong’s property market could be revised.

Both investors and home buyers will certainly watch closely for signs of any change in policy that could set Hong Kong’s residential property market on a new track.

Share

Joseph Tsang

Managing Director, JLL Hong Kong

Never miss an update from The Investor.

Subscribe Now!