October 1, 2022


Choi Hung Estate in Hong Kong
An aerial view shows the Choi Hung public housing estate and other residential buildings with the peak of Lion Rock in the background, in Hong Kong, China, on June 3, 2021. The picture was taken on June 3, 2021 by a drone.

When Stephanie Cheung bought a small, two-bedroom apartment for HK$7.7 million (US$981,041) as an investment in April 2021, she made a 6% gain by the summer as Hong Kong’s property market hit all-time highs.

The rise in prices was driven in part by optimism that Hong Kong’s borders will reopen after some of the world’s strictest measures against COVID-19 in two-and-a-half years.

None of that came true today.

The price of Cheung’s 450 sq ft flat has fallen by 6%, and the rental income of HK$16,300 is no longer enough to cover the mortgage repayments after the monthly interest increased by HK$2,400 a few months ago.

“I made the purchase hoping to reserve capital, but now I just wanted to use the shortest time and the least loss to sell this apartment,” said Cheung, 40, who lives in a larger rented apartment with her family.

Cheung’s is not an isolated case as rising mortgage costs and a bleak economic outlook have deepened pessimism among homeowners.

This presents a significant political headache for the city’s new leader, John Lee, who must balance the needs of different sectors of society. Lee gives his first policy address in October.

“John Lee needs to keep property prices under control for citizens and young people, while he can’t afford to let prices fall because that would threaten the wealth of the middle class,” said Hong Kong Property Services chief operating officer Dave Ma.

House prices in Hong Kong, the world’s most unaffordable market in terms of income and home values, are expected to fall by about 10 percent this year, the first decline since 2008.

Cheung is now set to post an even bigger loss after some banks raised their interest rates by 12.5 basis points on Thursday, the first increase in four years.

MORTGAGE STRESS

Hong Kong homebuyers have enjoyed ultra-low rates for years, and many mortgage plans are linked to floating interbank rates, which have largely remained below 1% in 2021 and during 2009-2016.

As interbank rates jumped to their highest level in more than 28 months in August, the effective mortgage rate rose to around 2.6% from just over 1% at the start of the year.

Interest rates in Hong Kong tend to move in step with US rates, as its currency is pegged to the dollar, putting pressure on interbank and mortgage rates.

Higher borrowing costs dampen the sentiment of home buyers.

House prices in the financial city fell by 4.5% in the first seven months compared to December, while the volume of transactions in the first nine months fell by 40% on an annual basis.

Estate agents said prices have fallen more than 7 percent so far this year to levels not seen since the third quarter of 2018.

“The gains of the past four years have been wiped out in four months,” said real estate agent Ma.

Many of the vendors are those leaving Hong Kong for good or residents forced to cash out to help struggling businesses.

Developers are also cutting prices, and some are selling new projects at discounts of up to 20%.

Ma said the market could stabilize in the near future if the government lifts travel restrictions with mainland China and overseas and relaxes the stamp duty imposed on second home purchases and foreign buyers.

Momo Chan, 35, a civil servant who bought the house last April before getting married, also said the reopening of borders was key to supporting the property market.

“I expected interest rates to rise and the market not to continue to rise, but I thought it would be steady and not this big of a drop in the last few months,” Chan said.

($1 = 7.8488 Hong Kong dollars)



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