20-year growth spurt of Hong Kong's property market

A lot has happened since 1997. Google was founded in 1998, Apple changed communications with the iPhone in 2007 — even though BlackBerry really got there first (1999) and we started tweeting in 2006.

Closer to home, Chek Lap Kok opened in 1998 and set a new airport standard but was a ghost town during SARS in 2003 (the last year for property bargains). The city politicised itself, culminating in the Umbrella Revolution in 2014 and, of course, Hong Kong reverted to Chinese semi-governance. Once constant: the SAR’s unique, frustrating, baffling property market remained unique, frustrating and baffling. The question that demands answering now is whether or not the next 20 years will be as enigmatic.

Hong Kong property market trend

>> Housing prices set to reach another record high

That was then

There are other changes of course. Housing prices have steadily crept up with the exception of outlier influences — chiefly the SARS public health crisis and the 2008 GFC. Along with climbing prices there has been a rash of moves designed to control them that have done little to nothing to cool anything down. Luxury residential prices in Hong Kong are second only to those in Monaco — where there is royalty — at roughly $37,000 per square foot according to data by Knight Frank. If the price index in 1999 was 100, today it is 330.

Prices were considerably lower two decades ago, averaging $4 million versus $7 million now, but affordability was weaker and there was a distinct schism between owners and occupiers. “Back in 1997 the majority of purchases were speculators. I would say 90%. Today, it’s the other way around 90% are end-users. And the 10% that are investors are investors, not speculators. The SSD stops that,” explains JLL managing director Joseph Tsang. Despite the poor affordability now, the market is healthier overall. Average mortgage rates in ’97 were a whopping 11.25% compared to today’s 2.25%. The end of period three-month HIBOR rate was 13.18% 20 years ago. In May 2017 it was 0.77%.

“Back then the market was so boiling, people were hoping to flip within a short while. It’s a funky thing that only applies in Hong Kong. People were buying a property [contract] in the morning and maybe selling it in the afternoon. It’s a much healthier market now. Not everyone can buy because the entry point is so high, but if you’re eligible you’re very healthy,” he says.

>> Comparison of primary and secondary markets

This is now

Of course, in 1997 there were hardly any buyers from the Mainland flooding into Hong Kong and driving up prices, but they’re not solely to blame. “All these cooling measures are stopping people from buying in the second-hand market. The second-hand market can’t provide innovative lending or financing packages, stamp duty rebates and so many other things,” argues Tsang, noting in a gruesome metaphor, “So purchasers have no choice but to go to the first-hand developers, hence pushing all these baby sheep into the jungle.” Developers are creating a false price market, making property look more expensive than it should be — or really is.

“All these things go back into pricing. As a developer, if you ask them to provide financing, it won’t be free. They have to put it all back into the sale price. If you ask for a rebate on the stamp duty… it will go into the price. But no one realises that and they think it sounds great,” states Tsang. The result: prices that are $1,000, $2,000 or $3,000 per square foot more than they should be.

Similarly, more and more mainland developers are getting into the Hong Kong residential game, which may not be as bad as it seems. Knight Frank placed new supply at well under 20,000 in 1997, but projects 22,500 per year starting in 2017. As Hong Kong’s so-called Big Seven continues to sit on its 125-million square foot land bank, Chinese developers are filling the gap.

To be fair, a great deal of the local land bank is in agricultural land in the New Territories, in vastly different stages of maturity, making development difficult. “Land assembly is difficult, there’s a lack of infrastructure in some cases the government hasn’t put in to benefit development,” argues Lau Chun-kong, international director and head of valuation and advisory services in Asia JLL. “Historically developers don’t sit on land. Only a small minority do that. If you put a measure in the land draft about a time limit, it will restrict the flexibility of the developer,” he says, in reference to a Singapore-style time cap on development after purchase. The time might be right for similar legislation, but that’s a can of worms the government doesn’t want to open just yet.

>> The arrival of aggressive developers from the PRC

So where do the next 20 years point?

Knight Frank, JLL and Savills all expect luxury prices to rise in the neighbourhood of 10 to 15% percent in 2017. After that it’s anyone’s guess. Mass residential flats are the smallest they’ve been since 2001 to keep lump sum prices down, but new flats perpetually clock in at roughly 17 times of median household incomes. Mainland developers — who purchased 100% of the residential land up for sale so far this year — will keep Hong Kong on their radar, which is another wild card. “Since Chinese developers’ requirements on the profit margin is not as, relatively, low as Hong Kong developers we believe the land prices will maintain at similar levels in the near future,” says JLL’s Lau. “The land sold in the past few months were in good locations, but the land selling in the future may not be the same, so prices may vary.” We’ll have to wait and see what 2037 looks like.

>> Issue 270: Hongkongers' investment trends

>> Issue 272: A mid-year review of Hong Kong's property market