Hong Kong property prices surging again!
Last Updated: July 04, 2015
Unsurprisingly, smaller-sized properties had the highest price rises. Prices of apartments smaller than 40 sq. m. rose by 17.3% during the year to April 2015, and apartments 40-69.9 sq. m. rose by 17.6%. Prices of apartments 70-99.9 sq. m. rose by 13.1%, while prices of apartments 100-159.9 sq. m. rose by 10.5%. On the other hand, average prices of apartments larger than 160 sq. m declined by 11.25%.
Hong Kong´s residential property market has risen relentlessly for several years. From 2008 to 2013, house prices skyrocketed by 134% (95.7% inflation-adjusted), driven higher by a flood of money from developed markets´ central banks in the wake of the global financial crisis. However, the market slowed sharply in the first half of 2014, with house prices rising only by 2.9%, due to government cooling measures. But the housing market bounced back quickly in the second half of last year.
Hong Kong’s currency peg to the dollar kept borrowing costs near record lows, fuelling continued property demand.
According to CBRE, strong occupier demand, coupled with a structural supply shortage and lack of fast-track supply replenishment solutions from the government, will continue to fuel the housing market this year.
But investment banks and other analysts remain cautious. They warn that Hong Kong’s property market could be facing a downturn in the coming years, due to several factors, mainly:
- the increase in housing supply;
- the intensification of government crackdowns on the wealthy in mainland China;
- intensified competition from other global cities like Tokyo, Singapore or London;
- Hong Kong’s economic slowdown;
- the potential interest rate rise in the U.S., and;
- the continuing implementation of government cooling measures.
Hong Kong's economic growth slowed to 2.1% during the year to Q1 2015, from 2.4% growth y-o-y to Q4 2014, mainly due to falling retail sales and weak exports. Hong Kong's economy is expected to grow by 2.8% this year, after 2.3% in 2014 and 2.9% in 2013, according to the International Monetary Fund (IMF).
Hong Kong's residential property market is unlikely to see big price rises
The mood in Hong Kong's property market has changed substantially since the year 2012, a bumper year for price rises. During the year to February 2013 prices rose no less than 30.58% (25.09% adjusted for inflation). From then the market began to slow. Over the past year to May prices have risen marginally in nominal terms. But in inflation-adjusted terms there has been a slight decline over the past year in residential property prices.
Rental yields are low. In Hong Kong gross rental yields range from 2% on the Peak, to around 4% for a small New Territories apartment. iven that the Global Property Guide’s figures are for gross rental yields, i.e., do not make any allowance for periods when the apartment is vacant, for legal costs, administration costs, cleaning and repairs, rental taxes, property taxes, and other taxes, etc, it is safe to say that landlords of high-end apartments in Hong Kong earn very little on their apartments.
Hong Kong is not a ‘typical’ market. It is a place where the rich choose to park assets in the form of apartments, as part of a diversified asset-safeguard strategy - like Monaco and Singapore. Such markets typically have lower rental yields than more ‘normal’ housing markets.
Round trip transaction costs are high for foreign buyers in Hong Kong (though the surcharge is unlikely to be permanent). See our Property transaction costs analysis for Hong Kong and Property transaction costs in Hong Kong, compared to the rest of Asia.
Rental income tax is in middle range in Hong Kong
Rental Income: Net property income is taxed at 15% (previously 16%). Net income is computed by deducting a standard 20% for repairs and outgoings from the assessable value (gross rent less irrecoverable rent and rates paid by owners).
Capital Gains: No capital gains tax exists in Hong Kong.
Inheritance: Inheritance tax or estate duty was abolished from 11 February 2006.
Residents: Taxation in Hong Kong is based on the territorial source principle; i.e., where the income was earned. Income derived from outside Hong Kong is not taxed in Hong Kong.
Roundtrip buying costs are high in Hong Kong
The total roundtrip transactions costs of buying and selling an apartment are high. There is a special stamp duty (SSD) at varying rates, from 5% to 20%, depending on the holding period of the residential property. Property held for longer than 36 months will not be subject to SSD. There is also buyer’s stamp duty BSD) at a flat rate of 15% on all residential properties acquired as of 27 October 2012.
Hong Kong law is pro-landlord
Landlords have an easy life in Hong Kong.
Rents: Rents can be freely negotiated in the private sector, which comprises about half of the rental market.
Tenant Security: The Landlord and Tenant (Consolidation) Ordinance 2004 removed security of tenure, i.e. domestic tenants no longer have the statutory rights to renew their tenancy at prevailing market rates.
Hong Kong’s economic slowdownHong Kong's economic growth slowed to 2.1% in Q1 2015 from a year earlier, down from 2.4% growth in Q4 2014, mainly due to falling retail sales and weak exports.
Retail sales dropped 2.3% y-o-y in the first four months of 2015, after a small decline of 0.2% in 2014, amidst slower growth in tourist arrivals and weaker tourist spending. In fact, the drop in exports of services, which includes tourists' contribution to the economy, lowered GDP in Q1 2015 by up to 0.2%.
Despite this, the economy is expected to grow by 2.8% this year, after 2.3% in 2014 and 2.9% in 2013, according to the International Monetary Fund (IMF).
Hong Kong’s small open economy depends largely on variables it cannot control – tourist spending, trade income, and foreign money inflows. With an average real GDP growth rate of 7.4% from 2004 to 2007, growth slowed to 2.1% in 2008, and then contracted by 2.5% in 2009. The economy bounced back strongly, with real GDP growth rates of 6.8% in 2010, and another 4.9% in 2011, but GDP growth fell sharply to 1.6% in 2012, according to the IMF.
In May 2015, nationwide inflation rate stood at 3%, from 2.8% in April, 4.5% in March, 4.6% in February and 4.1% in January 2015, according to the Census and Statistics Department. The country’s inflation rate averaged 4.5% from 2011 to 2014, in sharp contrast from an average of -0.8% from 2000 to 2007.
Given the recent energy price falls, the government recently cut its forecast for headline inflation to 3.2% from 3.5%.
The country’s jobless rate remains low. Unemployment was 3.2% in May 2015, slightly down from 3.3% by end-2014, according to the Census and Statistics Department. Hong Kong’s unemployment rate averaged 3.5% from 2010 to 2014, down from an average of 5.5% from 2000 to 2009, according to the IMF.
Wages and earnings rose further. The nominal wage index rose by 4.1% in March 2015 from the same period last year.