HK home prices look immune to protests

Hong Kong’s protests are damping real estate activity, spurring speculation of a long-overdue tumble in the city’s notoriously expensive housing market. Prices are likely to prove more resilient than some expect.
Home transactions have dropped by more than half from this year’s peak in May, before the unrest began, to 3,447 in September and 4,001 last month, figures from the Hong Kong Land Registry show. While the series is volatile, that’s about a fifth below the average number of monthly sales in the past five years. Amid worsening violence in November, the number of transactions in 15 housing estates tracked by Midland Realty International Ltd. slumped 78% last weekend from a month earlier.
With tear gas and transport disruptions an almost daily occurrence across multiple districts, it’s hardly surprising that potential home buyers have been deterred from viewing apartments. Yet a widely followed index of prices compiled by Centaline Property Agency Ltd. has slipped only 4.4% from its high in June. The gauge has actually risen in past two weeks.
Three key factors combine to mitigate against a crash in what is regularly ranked as the world’s least affordable housing market: low interest rates, inadequate supply, and high levels of equity.
Financing remains cheap. Hong Kong’s one-month interbank rate, against which most mortgages are priced, has risen sharply in November, to 2.53% from an average of 1.72% in October. That’s still relatively low on a longer-term perspective, though. One-month Hibor was above 5% in 2007 and peaked at more than 20% in 1998 during the Asian financial crisis, when property prices crashed.
Moreover, many mortgages have a cap that’s determined by banks’ prime lending rates. HSBC Holdings Plc, the city’s biggest bank, reduced its prime rate last month for the first time in 11 years, by 12.5 basis points to 5%. That followed a cut in the Hong Kong Monetary Authority’s base rate. Hong Kong interest rates track those in the US because of the local currency’s peg to the dollar; the Federal Reserve has lowered its target three times since July.
Meanwhile, supply remains constrained. Hong Kong Chief Executive Carrie Lam has announced programs to boost construction of public housing, but these won’t bear fruit for years. Hong Kong has a 10-year supply target of 450,000 homes. Even if achieved, that goal is 10% less than projected demand, according to Bloomberg intelligence analyst.
The third pillar of support is relatively low leverage. Hong Kong home buyers have been forced to finance purchases with an increasing amount of equity as prices have climbed. The loan-to-value ratio for new mortgages dropped to 46% in September, from a peak of 69% in 2002, according to data from the Hong Kong Monetary Authority.
While low leverage won’t prevent prices from falling, it makes it harder for home owners to fall into negative equity and limits the risk of a self-perpetuating downward spiral of selling. Higher down payments make speculation more expensive and encourage owners to hang on to their real estate even in bad times.
—Bloomberg