No ‘withdrawal symptoms’ seen in city’s housing

    05/07/2024 - 11:16

    This article appeared originally in China Daily on 7 May, 2024.
    Authors: Ryan Ip, Vice President cum Co-head of Research, Jason Leung, Head of Land and Housing Research, Alvin Chiu, Assistant Researcher at Our Hong Kong Foundation


    More than two months since the withdrawal of the decadelong property cooling measures, we are now better placed to answer these questions: What effect has the relaxation of restrictive measures brought to the market? Has it broken the balance of supply and demand by introducing excessive demand from speculators?

    Above all, eliminating demand-side management measures is expected to restore market liquidity and is most beneficial for upgraders. Before this, the norm for upgraders was to sell their property first and then to buy a new one to avoid additional taxes. However, the curbs made it difficult for homeowners to sell their homes. Investors and foreign buyers were disincentivized from entering the Hong Kong property market as it was primarily dominated by end-users. Consequently, fewer potential buyers translated into fewer transactions, making it difficult for homeowners to sell their properties and climb up the property ladder.

    This was especially evident during periods of poor market sentiment when transactions were scarce, almost bringing the market to a standstill. By comparing the turnover rate of residential properties in 2023 with that of 2009 — the year prior to the implementation of the cooling measures — the substantial impact of the additional taxes brought by the cooling measures becomes apparent. In 2009, the residential turnover rate exceeded 10 percent. However, since the implementation of the cooling measures, the property market has experienced a continuous decline in trading volume. Combined with weak market sentiment, the turnover rate dropped to less than 4 percent in 2023. A low turnover rate indicates weakened market liquidity, potentially forcing sellers to offer steeper discounts.

    Following the withdrawal of the curbing measures, there are signs of improving market liquidity. In March, the primary market recorded 1,485 transactions, the highest in the past 12 months. The secondary market saw 2,701 transactions, marking the highest in the past eight months. As market sentiment improves, we can anticipate a gradual recovery of market liquidity to the levels before the implementation of cooling measures. The removal of cooling measures was great news for homeowners intending to climb the property ladder, as they no longer need to worry about tax issues or the possibility of struggling to find buyers for their flats.

    In addition to improved market liquidity, homebuyers also benefit from the newly announced relaxations in mortgage policies. Prior to the February Budget announcement, nonfirst-time homebuyers were subject to stress tests when applying for mortgages, limiting their monthly mortgage payments to 60 percent of their income in the event of a 2 percentage point increase in interest rates. However, with the suspension of stress tests as announced in the Budget, buyers now only need to ensure that their mortgage payments at the current interest rate do not exceed 50 percent of their income. This adjustment makes sense considering that we are likely at the peak of the current interest rate cycle. It is also now slightly easier for buyers to obtain the same mortgage amount, with a 4 percent increase in the maximum loan amount for those with the same income levels. Although the increase may be modest, it is still positive news for homebuyers who narrowly missed the previous threshold.

    The withdrawal of all property cooling measures also makes the Hong Kong property market more attractive to global talent. Hong Kong now has fewer restrictions on foreign buyers compared to other markets in the region. Despite recent relaxations, first-tier mainland cities such as Shenzhen still maintain stringent restrictions on property purchases, allowing each resident household to buy only one or two flats, while purchases by nonresidents are still prohibited. Singapore recently increased stamp duties for foreign buyers from 30 to 60 percent, and for property purchases through corporations or trusts from 35 to 65 percent. In contrast, Hong Kong now allows anyone, whether individuals or companies, to purchase properties without additional stamp duties, making it more tax-efficient than other major property markets in the region. This provides an added reason for global capital, and eventually, talent, to migrate to Hong Kong. At the same time, some worry that the withdrawal of the cooling measures will lead to a resurgence of short-term speculation. However, based on our observations, the property market does not seem to have the necessary conditions for speculation to reemerge. Investors still face mortgage rates exceeding 4 percent, while the gross rental yield for property investments is only around 3 percent. The actual rental yield is even lower when management fees, maintenance costs and property taxes are factored in. With a negative carry, or the cost of financing exceeding rental income, investors and speculators have little incentive to increase their stakes.

    Furthermore, since efforts to enhance land supply have yielded substantial results, the Hong Kong Special Administrative Region government now has more land reserves at its disposal than before. This is evident from the latest land sale program. Out of the eight residential sites included, two were new sites added after removing two Tung Chung sites. Furthermore, the government has also pledged to make available land for no less than 80,000 private housing units in the coming five years in the Budget, much more than the 72,000 units committed last year. This is a sign that the government is better equipped with a comprehensive set of tools to respond to fluctuations in the housing market.

    In short, the residential market is expected to remain relatively stable after the withdrawal of the cooling measures, providing more choices for market participants while removing obstacles for incoming professionals.