Why it’s time to remove cooling measures

THESE GROUPS DRIVE DEMAND IN LUXURY RESIDENTIAL MARKETS

Rental demand in Hong Kong’s luxury leasing market is still being driven by Mainlanders moving to Hong Kong amid the sporadic lockdowns across cities in China.

According to Savills, luxury residential rents have continued to rebound slightly as the city began to mandate a “3+4” hotel quarantine measure in August with a further relaxation in late September to “0+3” while the local epidemic situation has remained broadly contained. Luxury rents on Hong Kong Island recorded a marginal growth of 1.2%, while rents in Kowloon and the New Territories rose by 1.9% and 0.5% respectively.

Here’s more from Savills:

Luxury rents on Hong Kong Island all recorded positive increments in Q3/2022, with Mid-Levels (+0.6%), Pokfulam (+0.6%), Happy Valley/ Jardine’s Lookout (+3.2%), Southside (+1.9%) all posting modest growth.

Demand is being driven mostly by Mainlanders whose focus is on traditional luxury enclaves such as Southside, The Peak and Mid-Levels. Elsewhere, a lack of available stock is helping to support rents and a tendency to renew has resulted in a general lack of movement. In contrast to the luxury markets, rents in the larger housing estates such as Taikoo Shing and Kornhill are falling as the exodus of local professionals overseas has pushed up vacancy.

Luxury property

In Kowloon and the New Territories, luxury apartments generally recorded modest growth over the quarter, with Tsim Sha Tsui/ Hung Hom (+1.8%), Ho Man Tin/Kowloon Tong (2.2%), Sai Kung (+2.2%), Sha Tin/Tai Po (+2.1%), except for Discovery Bay (-2.0%).

PRC students are stimulating demand for shared flats in areas like Hung Hom and Ho Man Tin. Heavy rental declines have been recorded in Discovery Bay as airline housing budgets have fallen dramatically.

Residential sales in the last nine months have dropped to its lowest level in 20 years

Why it’s time to remove cooling measures

Property expert JLL has urged the Hong Kong government to remove the cooling measures in the housing market since it is “no longer overheated.”

Amongst signs that show the market has cooled down include the mass residential prices dropping over 7% year-to-date and average monthly residential sales transactions for the last nine months hitting its lowest level in 20 years, said JLL.

In the first nine months of 2022, only an average of 4,100 flats per month changed hands, lower than the previous low of 4,200 transactions in 2013 when the government introduced the Double Stamp Duty.

With housing prices expected to drop 10% for the year, JLL said borrowers who rely on high LTV mortgages will be at risk of falling into negative equity.

Sales in the luxury markets likewise dropped in 2022, with only 500 flats worth over $20m sold per quarter in the first nine months, 55% less than the average of 1,100 deals in 2021 and about 40% lower than the average quarterly transactions in the last five years.

“The down cycle in the housing market has just started and the market will continue to face headwinds. Although home prices are unlikely to fall off a cliff, the city will probably suffer a prolonged down cycle that we witnessed in 1999-2003 due to interest rate hikes, a reversal in liquidity, weakening global and regional economies, and geopolitical concerns. Housing prices dropped a cumulative total of about 50% from 1999 to 2003, or about 10% a year,” Joseph Tsang, chairman of JLL in Hong Kong, said.

“We expect the prices of mass residential will extend the decline in 2023. If the cooling measures remain amid the backdrop of the global economic downturn and political turmoil, we will see a sharper price correction and rising cases of owners in negative equity,” Tsang added.

Removing stamp duties

Tsang said removing the punitive stamp duties like the Special Stamp Duty and Buyers’ Stamp Duty will help avoid negative equity from becoming an issue in the city again.

“If the housing prices dropped further, developers are likely to be extra cautious in land bidding, which will affect land sale revenue as a result,” he explained.

To avoid developers slowing down their urban regeneration efforts amidst the interest rate hikes, Tsang said the government must remove the Buyer’s Stamp Duty.

“The government can also consider adjusting the levy of Special Stamp Duty only on vendors who had made gains when the flats are sold while freeing the loss-makers from SSD liability,” he added.

In Q2, the Buyers’ Stamp Duty amounted to $410m, the lowest quarterly receipt since the duty was levied in 2014. Meanwhile, Doubled Ad Valorem Stamp Duty dropped to $1.3b, the second lowest following the lowest level recorded in the first quarter of 2022.

The low levels of stamp duties receipt are signs of subdued sentiment among both investors and owneroccupiers, according to JLL.

If the housing prices dropped further, developers are likely to be extra cautious in land bidding

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