Hong Kong’s real-estate correction has no winners

Sun Hung Kai Properties

26/10/2022 01:57

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Thomas Shum
       HONG KONG, Oct 25 (Reuters Breakingviews) - The pain of
Hong Kong’s property correction will be shared by all. Secondary
home prices in the world’s most unaffordable housing market have
fallen 8% since the beginning of the year due to a combination
of rising interest rates, a brain drain and the weakening local
economy. Higher borrowing costs bode ill for prospective buyers
and homeowners, adding pressure to developers.
    A chronic land shortage and speculative buyers have kept
Hong Kong’s notorious property prices out of reach for most
residents. The median family needs 23.2 years of income to
afford a home, according to the 2022 Demographia International
Housing Affordability study. 
    Yet falling prices have not brought relief. On the contrary,
the cost of bank mortgages, of which 96.6% are linked to the
city’s Interbank Offered Rate, has been rising in line with the
U.S. Federal Reserve’s rate increases. Top lenders including
HSBC  HSBA.L   0005.HK  hiked up their so-called prime rates by
12.5 basis points last month. Analysts at Goldman Sachs estimate
the current effective rate for most new borrowers is  2.875%, up
from roughly 1.5% at the end of 2021, and forecast that to rise
to 3.25% - a level not seen since 2008.
    Major property developers including the $33 billion Sun Hung
Kai Properties  0016.HK , Henderson Land Development  0012.HK 
and New World Development  0017.HK  have been cutting prices to
lure buyers. Even so, residential transactions have sunk to a
20-year low, and those with major development plans, like
Henderson Land may see their profitability squeezed by higher
rates. The Hang Seng Property index is down 35% since 2021; on
average, the top five developers are now trading at a 65%
discount to their 2022 net asset value, estimate Jefferies
analysts.
    More pain is yet to come. Hong Kong’s second-quarter GDP
shrank by 1.3%, reflecting a weak economy impacted by inane
Covid-19 restrictions battering consumption and tourism. That
has also led to a brain drain and a departure of 113,200 people
from “Asia’s world city” between mid-2021 and mid-2022, a
problem that Chief Executive John Lee is desperately trying to
address. And with the border to mainland China still closed, the
property market cannot count on capital inflows from up north.
It’ll be a tough road to recovery.
    Follow @t__shum on Twitter
    CONTEXT NEWS
    Secondary market home prices in Hong Kong have dropped as
much as 8% since the start of the year and are on track to reach
a five-year low.
    In a report dated Oct. 4, analysts at Goldman Sachs revised
their residential property outlook, predicting a 30% plunge by
the end of 2023 from last year’s levels.
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 (Editing by Robyn Mak and Katrina Hamlin)
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