True interpretation of Hong Kong

CHESTER LEUNG

True interpretation of Hong Kong residential market under COVID-19

CHESTER LEUNG

Director at CHFT Advisory and Appraisal Limited

The pandemic has affected all sectors of the economy with some sectors having a harder time than others. Although rents in the Hong Kong residential market started to slide in the middle of last year, prices are still at a high level. If we go back to the early stages of the pandemic, everybody was holding a waitand-see attitude on the property price movement with some even hoping that prices would plummet as much as what we saw during SARS in 2003. However, things didn’t pan out as expected with rents falling but not prices meaning that the rate of return is going to drop further. However, if we look at it from a macroeconomic view or from the micro view of rate of return, why do Hong Kong property prices have this kind of performance? With the strange situation of the property market as it is now, how do we examine it in order to really understand it?

Game players in the residential market

Property prices are determined by transactions between buyers and sellers. However, we cannot just focus on property indices. If we do not take note of trends and changes in the transaction volume of the property market, we will not be able to learn of the true situation.

The property price reflects the buying power of the buyer and holding power of the seller. If the epidemic impacts the income of a majority of people in the market, this would have been very rare historically. However from another perspective, it can be so said, that for a small group of people, wealth and income have not been affected too much by the epidemic. We can say that if only it was just this small group of people that played this property game, property prices would not necessarily be affected to the same extent and drop sharply.

For any commodity, the buyer will strive for the lowest price while the seller will strive for the highest price in the transaction. Therefore, we have to start off with the situation of owners and buyers from a social perspective, and analyse the situation of the owner and buyer, before we can understand the true meaning behind each transaction.

Owners entering retirement stage

In the Hong Kong residential market, the majority of the owners are “baby boomers”, who were born after the war. On entering the latter part of their lives, they will not be investing in their careers in the same way as they did when they were young, nor will they easily make high-risk investment decisions. On the contrary, they are paying more attention to health, with less outgoings on clothing, eating out, living accommodation and travel.

Strong holding power of owners

The pandemic has been a huge blow to many employees and employers, but it has had only a limited effect on those who have retired. Since their investment portfolios are generally prudent in nature, the volatility in the stock market has not shaken their assets. What’s more, according to statistics, about 65% of the real estate units in Hong Kong have no mortgage repayment obligations. Therefore, the current pandemic has only a very limited economic impact on these retired owners who do not have loan payment pressure, liquidity needs and reasons for forced sale.

Whether property prices will plummet depends on the holding ability of owners. If they have an urgent liquid capital need, only then will they slash prices aggressively to sell the asset as soon as possible. Only when these kinds of owners dominate the market will property prices be reduced drastically.

Therefore, with owners having no urgent need to sell their flats, and coupled with government’s anti-speculation measures to keep a lid on the property market, this has caused families who need to move to bigger flats to delay their decision to sell and buy and thus this has led to a supply shortage in the secondary market. Only when they just suddenly realise that it was a seller’s market when they put their flats on the market, would each seller be thinking the same thing, that is sell only when the price is right.

Marriage compound divorce adds fuels to demand

With every case of marriage, the housing needs for two families then becomes housing needs for three families. Increasing marriage cases boosts demand for housing. However, the majority of commentary on housing neglects to mention divorce statistics. In fact, with every case of divorce the housing needs of one family now becomes the housing needs of two families. The demand for small and medium-sized units will increase no matter whether the demand was triggered by marriage or divorce.

Conclusion

The housing market under the pandemic has experienced the strange phenomenon of falling rents but prices staying high. This is because owners have no financial pressure, and with extremely low interest rates, the fall in rents has not affected the repayment burden of people with mortgages. The only people playing the “property market game” are a group of high-income earners. Under the pandemic, their incomes have not been as adversely affected as other people’s incomes. In addition, with the property market mercilessly distorted by government policies, this has only made people postpone the decision to buy over a long period. All along, the market has been merely catching up with pent-up demand. Therefore, the chances of property prices falling sharply like in 2003 are extremely slim. Moreover, if the economy recovers, high-income earners will respond relatively faster, and there will be plenty of opportunities for the property market to cease falling and head up again.

The property price is the result of a transaction. To only look at the property price index, to not look at the changes in the transaction figures, and to not further analyse the needs and circumstances of life from a social perspective, is to easily misinterpret the actual situation of the property market, and thus misses the true conclusion by a considerable margin.