A moderate rise can be expected for residential properties
According to the Rating and Valuation Department, residential property prices grew by 0.3% in the first 11 months of 2020. Since the beginning of this year, uncertain factors such as the pandemic, Hong Kong's economic recession and Sino-U.S. friction have all brought downward pressure on residential property prices. However, with the advent of vaccines, the economy is expected to gradually recover, together with expectations that interest rates will remain low and housing supply will remain tight, residential property prices are expected to rise moderately in 2021.
Global and Hong Kong economy will recover further. Gradual vaccination in Hong Kong is expected to greatly boost economic growth and slow the growing unemployment rate. Once the pandemic gets under control, border control measures are expected to be relaxed, which will help the retail and tourism industries to recover. Although the United States' hardline attitude towards China is expected to continue under President Joe Biden, his policy measures will be more rule-based and therefore uncertainties in foreign trade, investment and financial markets can be reduced.
Low interest rate environment in Hong Kong is expected to continue. The Federal Reserve has cut its Fed Funds Rate target to a historical low close to zero, and is expected to keep rates near zero at least through 2023. Therefore, Hong Kong's low interest rate environment is expected to continue. Abundant funds in the banking system and the low interest rate environment will continue to support the performance of the property market.
Supply of private housing in Hong Kong will remain tight. According to the Transport and Housing Bureau's latest data, the potential supply of private housing in the primary market for the next three to four years will be 92,000 units, staying at a four-year low. From a medium- to long-term perspective, the Government has continuously downgraded its supply target for private residential properties. Since 2018, the average annual private housing supply target for the next ten years has been reduced from 18,000 units to 12,900 units. However, the number of domestic households in Hong Kong has continued to increase by an annual pace of over 1% in the past six years, pushing up housing demand.
Finances of Hong Kong citizens are relatively healthy. In recent years, due to multiple rounds of demand-side management measures and Prudential Measures for Mortgage Loans introduced by the Government and the Hong Kong Monetary Authority, families with mortgages are generally in a relatively healthy financial situation. As of July 2020, the average debt-to-income ratio of newly approved residential mortgage loans was 37%, which was still healthy and low. In 2020, we also saw that home owners were able to hold on to their properties and no large-scale sell-off took place, therefore residential property prices can be supported. Of course, the strength of the economic recovery is still constrained by the progress of the vaccination programme and the easing of border control measures. The prospects for Sino-U.S. relations and whether local social unrest has completely subsided will also bring uncertainties to the residential property market. But on the whole, the upward trend of the economic growth and the low interest rate environment will push residential property prices to rise moderately.
Commercial properties may be close to bottom
Compared with residential property, the performance of commercial property (including offices and retail shops) is more closely correlated with the overall economy. Therefore, the recovery of the global and Hong Kong economy will benefit the commercial property market.
Mainland China will lead the global recovery. Hong Kong can seize the opportunities brought by the "interconnection" with the Mainland and attract multinational companies to operate in Hong Kong. It is also expected that the uncertainties of Sino-U.S. relations will be reduced, enhancing the confidence of enterprises in expanding and investing in Hong Kong, and therefore boosting the demand for office properties.
The decline in Hong Kong's retail sales has narrowed to single digits. The low base, coupled with the gradual recovery of the economy and a strong RMB, will benefit the retail industry next year and bring support to the retail property market.
In addition, the commercial property market has been in a downturn for two consecutive years. In August and November this year, the Government relaxed the loan-to-value ratio cap for mortgage loans on non-residential properties and abolished the Double Stamp Duty on non-residential property transactions. These actions will also support the commercial property market. Of course, given that Hong Kong's economic recovery is still subject to the progress of the pandemic control, it is believed that in the near term, the commercial property market will still be under downward pressure, and the process of the commercial property market recovery is expected to be slow.