Just when we thought we would see some relief from the U.S. Fed’s interest rate hikes, Hong Kong’s banks decided to raise their rates, and not at the best of times. April’s Private Domestic Property Price Index, released by the Rating and Valuation Department, climbed 0.54% to 354.2 – marking the fourth consecutive monthly increase and a seven-month high.
The Hong Kong residential market’s cumulative growth in the first four months of the year reached 5.83%, driven primarily by small and medium-sized homes. After also weighing the impact of high interest rates and stock-price volatility, Colliers has adjusted its forecast for the year-on-year increase of small and medium-sized home prices to a 1% to 4% range, which could see residential prices reverse their positive H1 trend and decline in H2.
Four key factors fuelled the Q1 surge in market sentiment – the border reopening, ramped-up new launches selling at close to market price, changes to the stamp duty, and an expectation that US interest rate hikes would slow. However, entering Q2, that positive energy had dissipated and the market slowed significantly. According to property agency data, April transactions fell 33% month-on-month to 5,755. As of 25 May, 4,581 transactions had been recorded.
The residential market’s performance is inversely tied to the interest-rate trajectory. According to the Hong Kong Economic Journal, the Hong Kong Interbank Offered Rate (Hibor) had risen for three consecutive days by 16 June, on the Hong Kong banking system’s low balance and the looming end of H1. The one-month Hibor related to the property mortgages went up by 0.2181% from the previous day (15 June) to 4.96774%, rising for eight straight days and hitting a half-year high. The analysis estimates that before the end of the month, the one-month Hibor will climb further, to more than 5%.
The rising Hibor will increase mortgage repayments for homebuyers and homeowners alike. Furthermore, the rising costs of general loans will also affect residential market sentiment. For example, business operators who need to secure loans to run their businesses will be more circumspect when allocating funds, and all the more likely to hold off on unnecessary purchases. Their caution will indirectly take purchasing power from the property market. In addition, investor preference is changing. Given the attractive interest rates, they pay more attention to short-term deposits with high interest rates or corporate debts, leaving less money for real estate acquisitions.
It is also worth noting that the Hang Seng Index contracting earlier this year has negative ramifications. As Hong Kong’s real estate market always takes its cue from the Hang Seng, buyers may exercise prudence in home purchases depending on its performance.
Lastly, homeowners have been more aggressive with asking prices due to the earlier positive sentiment, buoyed by the positive factors mentioned earlier.
However, the price difference between primary and secondary homes is narrowing, and newer homes have higher resale value, which is why secondary homes are lagging. Secondary home sales require a longer time to reach completion which, coupled with developers actively launching stock, dampens the joy of lived-in homes. Prices of secondary homes will gradually adjust to meet market prices to get deals done faster, thus affecting overall home prices.
Analysts are looking to a future influx of residents under the Government‘s various talent recruitment schemes to drive demand. However, it will be some time before they settle in and consider purchasing a home. With mounting emigration pressure, many sellers may cut prices, especially in the second and third quarters (the traditional peak seasons for leaving the city), further weighing on market sentiment.
Kathy Lee, Head of Research, Colliers