June 7, 2023

Choi Hung Village, Hong Kong
An aerial view shows the Rainbow public housing complex and other residential buildings with Lion Rock peaks as the backdrop in Hong Kong, China, 3 June 2021. Photo taken with drone on June 3, 2021.

When Stephanie Cheung bought a small two-bedroom apartment for HK$7.7 million ($981,041) as an investment in April 2021, she gained 6% ahead of the summer as Hong Kong’s property market surged to an all-time high ‘s earnings.

Part of the reason for the surge in prices is optimism that Hong Kong’s borders will reopen after some of the world’s toughest COVID-19 measures in the past two-and-a-half years.

Today, none of this has materialized.

The price of a 450-square-foot unit in Zhangjia has fallen by 6%, and the rental income of HK$16,300 is no longer enough to pay off the mortgage after the monthly interest increased by HK$2,400 a few months ago.

Cheung, 40, said: “I bought the house to save money, but now I just want to sell the apartment in the shortest time and with the smallest loss.”

Cheung’s isn’t an isolated case, as rising mortgage costs and a bleak economic outlook deepen homeowner pessimism.

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

“John Lee needs to control house prices for the grassroots and young people, but he can’t let house prices plummet because that would jeopardize the wealth of the middle class,” said Dave Ma, chief operating officer of real estate brokerage Hong Kong Property Services.

Home prices in Hong Kong, the world’s most unaffordable market for income-to-house prices, are expected to fall by about 10% this year, the first decline since 2008.

Cheung will now record even bigger losses after some banks raised rates by 12.5 basis points on Thursday, the first rate hike in four years.

mortgage pressure

Hong Kong homebuyers have enjoyed ultra-low interest rates for years, with many mortgage schemes tied to floating interbank offered rates, which have remained largely below 1% in 2021 and 2009-2016.

Effective mortgage rates have risen to around 2.6% from just over 1% at the start of the year as interbank rates surged to a more than 28-month high in August.

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

Higher borrowing costs are dampening homebuyer sentiment.

Financial City house prices fell 4.5% in the first seven months from December last year, and transaction volume in the first nine months fell 40% year-on-year.

Prices have fallen more than 7% so far this year to their highest level since the third quarter of 2018, real estate agents said.

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

Many sellers are residents who have left Hong Kong permanently or are forced to cash out to help struggling businesses.

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

Ma said the market could stabilise in the short term if the government lifts travel restrictions with mainland China and overseas, and eases stamp duties on purchases of second-hand properties and foreign buyers.

Chen Momo, a 35-year-old civil servant who bought a house last April before getting married, also said reopening the border was crucial to supporting the property market.

“I had expected interest rates to rise and the market would not continue to rise, but I think it would stabilize and not fall as sharply as the past few months,” Chen said.

($1 = HKD 7.8488)

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