Hong Kong residential market resilient

HONG Kong's residential property market has remained resilient despite the recent volatility in the global stock market, according to Knight Frank.

In addition, Knight Frank said the volatility will only have limited impact on Hong Kong’s residential market.

According to Knight Frank, between 1980 and 2006, the Hang Seng Index saw eight major downturns with corrections in excess of 30%. However, the local residential market saw only four slumps with price drops of more than 10% over the period.

In 1987, Hong Kong’s stock market crashed in the wake of the global stock market meltdown and the Tiananmen Square crackdown in 1989, but local residential prices did not experience substantial corrections in tandem.

Knight Frank said the residential market is less volatile than the stock market as the former is dominated by owner-occupiers, whilst the latter by short-term investors.

Owner-occupiers accounted for 69% of all Hong Kong households residing in private properties in 2006. However, according to a survey conducted by the Hong Kong Exchange and Clearing in December 2005, only 17.5% of local retail investors were long-term investors who did not trade during the preceding twelve months.

Most homeowners are unwilling to sell in a weak market to avoid capital loss, but they are more likely to take profits and upgrade their residences in a strong market.

On the contrary, most stock traders tend to sell when they anticipate a price correction even if that involves capital loss.

According to the Knight Frank, previous experiences show that the residential market in Hong Kong suffers substantial corrections only when interest rates are rising, supply is abundant and prices become unaffordable. However, none of these conditions are present at the moment.

In the coming 12 months, local mortgage rates are expected to stay below 3%, as the US needs an ultra-low interest rate environment for an extended period of time to revive its economy and property market.

Such a mortgage rate will be far below the levels triggering the previous property market downturns during 1982-84, 1994-1995 and 1997-2003.

Moreover, residential supply is expected to remain tight until at least 2011, lending support to local residential prices. The completions of private residential units are estimated to be less than 10,000 in 2008, the lowest level since 1971 when supply statistics first became available.

During the period between 2008 and 2011, the supply of new homes may amount to only 14,500 per year, less than the projected annual take-up of over 20,000 units and far below the annual average completions of 27,600 between 1998 and 2004.

Further, housing affordability is at a relatively comfortable level even after residential prices have risen 120% in the past five years and 28% in the past six months. The average price of a typical private residential unit in the first two months of 2008 was about HK$3.9 million, while the medium income of households living in the private residential properties is estimated to be HK$24,500.

Based on a down-payment ratio of 30%, a mortgage rate of 2.9% and a payment period of 30 years, a typical family would spend about 43% of the household income on mortgage payment, compared with more than 110% in mid 1997 and more than 200% in late 1981.

Australian Property Journal