Hong Kong Residential - Cooling but not crashing

The Hong Kong residential market has been sliding for nearly a year. How severe will the correction be?

19th May 2016

Continue to the other two articles...

Recovery stable despite heightened uncertainty

The world economy appears to be stablising after a turbulent start to the year, but uncertainty remains high. Brian Biggs, CFA, Senior Research Analyst, Global, explains. Click here to read more.

Threats and opportunities in UK property

Economic and political uncertainty have risen in the UK and London. What are the threats and opporunities this uncertainty carries? Tim Francis, Head of Research, Britain & Ireland, offers some insights. Click here to read more. 

The Hong Kong (HK) residential market has entered a period of heightened uncertainty, with recent price declines and volatility (Chart 1).  Both mass market and luxury residential prices have fallen 11.0% and 7.3% respectively1 .  While these price corrections look small in comparison to gains over the last decade, the market consensus is that prices will continue to fall through 2016 due to a combination of increased economic and political headwinds, likely increases in US interest rates, new supply and stretched price-to-income ratios.  The remainder of this article looks at the forces influencing HK residential property prices.  In our view, the market is set to cool, but not crash.

Heating up…

From 2009-14, HK’s economy and asset prices were substantially boosted by a combination of ultra-low interest rates2 and very strong economic output on the mainland.  Soaring activity on the mainland bolstered the HK equity market and financial services sector, as HK was used as a major conduit for Chinese firms to access global capital markets.  Greater prosperity on the mainland flowed through HK property markets, with strong demand for residential real estate from wealthier PRC citizens looking for diversification.  

Such a strong economy would normally have occasioned higher interest rates, but rates in HK remain close to 0% due to the HKD peg.  Indeed actually with inflation, the real interest rate was heavily negative. The other major impact of ultra-low interest rates in the US was a fall in USD, which had flow-through effects on the HKD. The most significant movement was against the RMB; from mid-2008 until early-2014, the HKD depreciated closed to 15% against the CNY.  The fall made HKD denominated goods, services and financial assets relatively cheap for mainland buyers.

The inevitable result of this market imbalance was rapid capital flows from low yielding cash into risk assets, driving prices of the latter upwards.  According to HK’s Rating and Valuation Department data (“RVD”), domestic property prices almost trebled between the end of 2008 and the end of 2015. 

…and cooling down

Each of the factors that supported HK’s economy from 2010-2014 started to show significant adjustment through 2015.  The Chinese economy has been slowing as it attempts to rebalance away from an investment/export led growth model and concerns about the strength of the mainland economy have clearly impacted HK.  In addition, the HKD softening trend started to unwind with more significant appreciation against the RMB (+9%) over the last twelve months. As well as dampening the price competitiveness of HK’s exports, it has made HK assets less affordable for mainland buyers. 

In addition, HK policy rates followed US policy rates upwards following the Federal Reserve’s 25 bps rate hike in December.  Whilst turbulence in global financial markets in the first quarter of 2016 has somewhat dampened expectations for subsequent rises, consensus is still for another 50 bps of increases in the US by year end.

Economic chills started to permeate the residential market midway through 2015, manifesting in a sharp decline in volumes.  January 2016 saw the lowest ever recorded number of secondary transactions at 1,983.  February 2016 saw only 217 primary transactions, the lowest monthly level since November 2008.  Inevitably, in a market with heavily declining transaction volumes pricing impact will begin to be experienced and this has accelerated in 2016 to date. 

So what next for the market?

HK’s residential market remains expensive by global stands; we estimate current prices are 17.4 times median income (Chart 2), which is well above the long term average of 11.6 times.  Our central economic forecast is for relatively lacklustre wage growth over the next three years, which means a reversion to mean in the price/income ratio is likely to primarily be driven by price adjustments.  This would imply a further price decline of 20-25% over the next two to three years.

Ordinarily, when an economy is weakening, interest rates are more likely to go down than up; loose policy can be very supportive of asset prices even in an environment of lacklustre growth. But HK is in the position where rising interest rates will have to be absorbed even if the domestic economy is weak, by virtue of its USD peg. On latest data as Q4 2015, the mortgage payment to income ratio is at 63%, well below the 93% experience during the 1997 Asian Financial Crisis, but well above the 1995-2014 average of 46%3.  Assuming a 100bps increase in mortgage interest rates and a reversion to the long-term ratio of affordability implies a 30% fall in prices.  

However there are three aspects which suggest that price corrections may not be as dramatic as implied by this mean reversion analysis.  First, developable land in HK is extremely scarce.  Land reclamation has proven insufficient to meet fundamental demand: in the period from December 2008 to December 2015, HK’s population grew by 360,400 while only 75,000 new private properties were completed (Chart 3); in essence the market has been structurally undersupplied for nearly a decade4

Secondly, HK remains a lowly leveraged residential market. The most recent data from the Census and Statistics department suggests that over 50% of HK homes are owned without a mortgage. We estimate that the aggregate LTV ratio for the private residential sector in HK is 19% which implies it is sub-40% even for those homeowners with mortgages.  The impact of rising rates on mortgage affordability in HK should be relatively muted as a result.  Thirdly, there have been a number of policy initiatives aimed at cooling the housing market since 2012, including stamp duty increases, LTV caps and stress tests.5  Since February 2013, all new mortgage applicants have been tested at spot-rate plus 300 bps.  Given these policy measures, default and negative equity are very unlikely to be systemic issues. Purchases from outside the Special Administrative Region have become very limited since restrictions were put in place.


Rapid appreciation in HK’s residential prices is far from unique. It is partly the result of factors that have characterised asset markets since the Great Financial Crisis.  Ultra-loose monetary policy and low returns on cash have pushed money into risk assets and residential property has benefitted particularly in “global cities” where there is strong demand due to demographic trends and tight supply.  Normalisation of central bank policy is likely to be the ultimate fundamental driver of stabilisation in global residential markets but the effects of this – as and when it happens – will be much wider felt than just in HK’s residential market. 

Price and interest coverage ratios are signalling that the market is hot.  It is rational to expect an improvement in these ratios, i.e. falling prices, over the next two to three years.  However other unique features of HK’s market should help stabilise prices.  Price and interest coverage ratios are very unlikely to converge to global averages given the gain in house prices over the last decade, which has been a huge exercise in wealth creation. These wealth gains will not be easily eradicated.  Ultimately HK remains an attractive place to live and do business in a regional and global context.  This supports fundamental demand, which when combined with supply-side dynamics, should ensure current pricing trends reflect a healthy market correction, not a crash.



1. “Mass” from Class A, B & C from RVD and “Luxury” from Colliers Residential Price Index. Data as April 2016.

2. A function of the peg-mechanism between the HKD and the USD.

3. Assuming 70% LTV on a 45sqm apartment for 20 year tenor.

4. Average household size according to Census & Statistics Department is 2.9 which implies an undersupply of around 50,000 units.

5. Stamp duty can be as high as 15% for non-permanent residents. LTV caps range from 40%-70% depending on property value and whether it is for owner-occupation or self-use. 

6. Latest data is at 3% of total transactions vs. 11% in late 2011 pre-policy restrictions.



View all Grosvenor contacts

Grosvenor Europe Disclaimer

Use of this Grosvenor Europe section of the grosvenor.com website (the “Grosvenor Europe Website”) is subject to the following terms and legal notices (“Conditions”).  You are being asked to agree to these Conditions because:  (a) you are accessing the Grosvenor Europe Website for the first time or (b) you are accessing the Grosvenor Europe Website from a different section of the grosvenor.com website.

The information in the Grosvenor Europe Website was prepared by Grosvenor Europe only for, and is directed only at, the limited categories of persons described under “LEGAL NOTICES” below.  The information in this Grosvenor Europe Website is not intended for the use of and should not be relied on by any other person.

Grosvenor Europe Limited is registered in England, with Company Number 04056191 and its registered office at 70 Grosvenor Street, London W1K 3JP.
This Grosvenor Europe Website contains general information about Grosvenor Europe and related entities and is intended for informational purposes only. The information contained on this Grosvenor Europe Website is not an offer to sell or a solicitation of an offer to purchase interests in any fund managed by Grosvenor Europe or a related entity, nor  is it intended to provide, and should not be relied on for, investment, tax, legal or financial advice.  Investors should seek applicable professional advice for their particular situation.  The information contained herein is a summary only, is not complete, and does not include certain material information, including potential conflicts of interest and risks associated with an investment with Grosvenor Europe and its related entities.

No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in the enclosed materials, including hyperlinks or references to other sites, by Grosvenor Europe or its related entities, and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions, to the fullest extent permissible by applicable law.  Users are responsible for evaluating the adequacy, accuracy, reliability, merchantability, non-infringement, and/or completeness of any information or the content available on this Grosvenor Europe Website or fitness for any particular purpose with respect to this Grosvenor Europe Website or any of its content.  The estimates, strategies, and views expressed herein are based upon past or current market conditions and/or data and information provided by unaffiliated third parties (which has not been independently verified) and is subject to change without notice. An investment with Grosvenor Europe is speculative and contains significant risks, including the risk of loss of some or all of an investment, and is intended only for sophisticated investors who meet certain eligibility criteria.  Such investments are not deposits or obligations of, or guaranteed or endorsed by, any bank and are not insured or guaranteed by any government or any other agency.


Information displayed on this Grosvenor Europe Website may contain material that is interpreted as a financial promotion for purposes of the Financial Services and Markets Act 2000 of the United Kingdom (the “FSMA”).  Grosvenor Europe is not an authorised person for purposes of the FSMA, and accordingly, the communication of information on this Grosvenor Europe Website is provided only for and is directed only at persons in the UK reasonably believed to be of a kind to whom such promotions may be communicated by an unauthorised person pursuant to an exemption under the FSMA (Financial Promotion) Order 2005 (the “FPO”).  Such persons include: (a) persons having professional experience in matters relating to investments (“Investment Professionals”) and (b) high net worth bodies corporate, partnerships, unincorporated associations, trusts, etc. falling within Article 49 of the FPO (“High Net Worth Businesses”). High Net Worth Businesses include: (i) a corporation which has called-up share capital or net assets of at least £5 million or is a member of a group in which includes a company with called-up share capital or net assets of at least £5 million (but where the corporation has more than 20 shareholders or it is a subsidiary of a company with more than 20 shareholders, the £5 million share capital / net assets requirement is reduced to £500,000); (ii) a partnership or unincorporated association with net assets of at least £5 million and (iii) a trustee of a trust which has had gross assets (i.e. total assets held before deduction of any liabilities) of at least £10 million at any time within the year preceding the promotion.  Any investment opportunities mentioned in this Grosvenor Europe Website are available only to such persons, and persons of any other description in the UK may not rely on the information in it.  Most of the protections provided by the UK regulatory system, and compensation under the UK Financial Services Compensation Scheme, will not be available.

Grosvenor Europe is established in the United Kingdom, which is a member state of the European Economic Area (the “EEA”).  Accordingly, this Grosvenor Europe Website is issued by Grosvenor Europe to the categories of persons described in the paragraph above that are both resident in and accessing this Grosvenor Europe Website from any member state of the EEA in reliance on its rights under the Directive on Electronic Commerce (2000/31/EC).  The member states of the EEA are:  Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom.

If you are not resident in an EEA member state or you are viewing this Grosvenor Europe Website in a country that is not an EEA member state, information displayed on this Grosvenor Europe Website contains material that may be interpreted by the relevant authorities in the country from which you are viewing the Grosvenor Europe Website as a financial promotion or an offer to purchase securities. Accordingly, the information on this Grosvenor Europe Website is only intended to be viewed by persons who fall outside the scope of any law that seeks to regulate financial promotions in your country of residence or in the country in which the Grosvenor Europe Website is being viewed. Examples of such persons may be governmental agencies, persons sufficiently experienced in investment business to appreciate the risks associated with investment services promoted on this Grosvenor Europe Website, large corporations and trusts and high net worth individuals. These examples are not country specific, may not be relevant to the country in which the Grosvenor Europe Website is being viewed and are provided for illustration purposes only. If you are uncertain about your position under the laws of your country of residence or the country in which the Grosvenor Europe Website is being viewed then you should consult your legal adviser.

Notice to Persons in the United States:

With respect to U.S. investors, investments in funds managed by Grosvenor Europe or a related entity are restricted to institutional investors who meet certain eligibility requirements.  Any potential investor should satisfy him or herself that an investment in any product of Grosvenor Europe or a related entity is permissible under the rules and regulations of his or her domicile.  This Grosvenor Europe Website is not directed to any person in any jurisdiction where the publication or availability of this Grosvenor Europe Website is or would be prohibited.


The related entities of Grosvenor Europe include Grosvenor Investment Management Limited, which is registered in England (Company Number 02774291) with its registered office at 70 Grosvenor Street, London W1K 3JP and which is authorised and regulated by the Financial Conduct Authority.

By ACCEPTING this disclaimer, you consent to the above Conditions and, in particular, you confirm that either:

(a)     you are resident in and accessing this Grosvenor Europe Website from one of the United Kingdom or another member state of the EEA and you qualify as an exempt category of person under the FPO (such as an Investment Professional or High Net Worth Business, as described under “LEGAL NOTICES” above); or

(b)     you fall outside the scope of any law that seeks to regulate financial promotions both in the country of your residence and in the country in which you are viewing this Grosvenor Europe Website, and therefore by accessing this Grosvenor Europe Website you will not contravene or cause Grosvenor to contravene any such law.