The signs of market optimism.
With the Coronavirus taking centerstage in everyone’s lives in Hong Kong and around the world and coming on the heels of last year’s widespread social unrest throughout the territory, the city’s local real estate market in 2020 has been decimated—or so some industry pundits have been saying. Yet, despite the dire warnings about an imminent housing collapse that would seem to scare people away from buying new homes, the reality on the ground reveals signs pointing to the contrary.
First-hand Property Transactions During the Outbreak of Coronavirus
In early March, Wheelock Properties announced the sale of 189 of 208 flats, (90%) on offer at their Ocean Marini project in Tseung Kwan O, resulting in purchases totalling close to HK$1.59 billion. This sale was no doubt given a strong boost due to attractive discounted prices and buyers’ anticipation of lowered interest rates in Hong Kong. And while it certainly shouldn’t be seen as a definitive indicator of an imminent recovery, it does indicate that cash-holding individuals exist in the market and have the confidence to invest. Wheelock’s second batch of sales, a few weekends later, had only slightly less success (80% sellout), though this was largely attributed to a significant spike in virus cases at that time, leading many interested buyers to remain at home.
Other property companies have had similar successes recently. The Richmond, a 90-unit Mid-Levels project from Henderson Land Development, was launched onto the market on January 21st this year. All 45 units offered thus far were quickly sold, indicating that despite the protests, there was still strong demand for new, smaller units in Mid-Levels. Flat sizes ranged from 206 to 300 square feet and the units were sold between HK$6.3 million and HK$9.7 million.
Market Forecast: Will the Coronavirus Affect Hong Kong’s Property Prices?
Low interest rates remain a significant consideration in buyers’ minds, since it makes home ownership more affordable and more attractive than renting over time. With average sales prices having only fallen ~7% since the onset of the protests (as of February 2020 data), this points to a general resiliency and confidence in the long-term outlook. In addition, the US Federal Reserve’s recent move to cut interest rates to near zero percent coupled with the reset of HIBOR to around 1.73% (as of March 19) will no doubt tempt potential homebuyers, even against gloomy macro-economic circumstances. This relative stability in prices is despite of the volume of buyers having dropped meaningfully since the protests began, with there being ~50% fewer monthly transactions of late. In other words, sellers have remained confident enough to not panic-sell, which would have led to much steeper price declines.
In terms of rentals, although many tenants are seeking steep discounts in this post-virus market, landlords (like sellers) are not panicking either. Rental prices have fallen ~8% since the protests started despite many prospective tenants initially thinking they can find properties at 30-40% discounts to what they were a few months ago. Significant fears relating to the virus does not directly translate to prices falling significantly. In fact, if fewer people are willing to buy, this naturally increases the net number of renters, partially offsetting reduced housing budgets or the (small) number of people fleeing Hong Kong.
The reality is that prices are a result of supply and demand. Supply has not changed, and demand may have softened in some pockets, but buyers willing to invest at or near current prices remain in the market. While these latest developments are hardly a bellwether marking the return of a thriving realestate market, they do, however, point to there being some optimists in the market. In past economic downturns, this pent-up demand has quickly stepped in as prices fell, leading to a smaller-than-expected drop in real estate prices, and a swift recovery.
Personally, I am quite concerned about the US economy and a potential cascade of debt defaults leading to a recession. Higher interest rates, unemployment and inflation are all possible outcomes and these would have a huge impact globally, including in Hong Kong. But these are not certainties, and my opinion is of limited value. It’s the market’s opinion that matters and there are those who remain cautiously optimistic (for now), despite the fears around the virus.