12th July 2024 – (Hong Kong) The latest figures from the Hong Kong Monetary Authority (HKMA) paint a grim picture of a market in freefall, with the number of negative equity cases nearly tripling in the first quarter of 2024. This alarming trend not only signals a deepening crisis in the city’s real estate sector but also raises serious concerns about the broader economic implications for Asia’s financial hub.
The HKMA’s report reveals that the number of so-called upside-down loans surged to 32,073 in the first quarter, up from just over 11,000 in the previous quarter. This marks the highest level since the aftermath of the SARS epidemic in 2004, a period that saw Hong Kong’s property market plummet to historic lows. The aggregate value of these negative-equity loans has ballooned to a staggering HK$165.3 billion, up from HK$131.3 billion at the end of December.
To put this in perspective, Eric Tso Tak-ming, chief vice-president of mortgage broker mReferral, notes, “As property prices have fallen by more than 20 per cent from their peak, most homeowners who entered the market with a high loan-to-value ratio from 2019 to 2022 have a greater chance of falling into negative equity.” This statement underscores the vulnerability of recent homebuyers who purchased properties at the market’s peak, only to see their investments rapidly depreciate.
The gravity of Hong Kong’s property market decline is further worsened by the latest Centa-City Leading Index (CCL), a key barometer of the secondary property market. As of the most recent data, the CCL has plummeted to its lowest point in nearly eight years, marking a continuous decline over four consecutive weeks. The index now stands precariously close to breaching the critical 140-point threshold, a level not seen since early October 2016. This represents a staggering 26.18% contraction from its peak in August 2021 and a 16.13% drop from more recent highs in April 2023. The decline has been particularly severe on Hong Kong Island, where property values have plunged by over 30% from their peak. This persistent downward trend in the CCL not only corroborates the surge in negative equity cases but also paints a bleak picture of the market’s overall health, suggesting that the road to recovery may be longer and more challenging than initially anticipated.
The current crisis is the result of a perfect storm of factors that have been brewing for years. Hong Kong’s property market, long considered one of the world’s most expensive, has been grappling with a prolonged downturn exacerbated by the global pandemic, geopolitical tensions, and shifting economic dynamics.
High interest rates have played a significant role in this downturn. As the Hong Kong dollar is pegged to the US dollar, the city’s monetary policy closely follows that of the U.S. Federal Reserve. The Fed’s aggressive rate hikes to combat inflation have translated into higher borrowing costs for Hong Kong homeowners, putting additional pressure on an already strained market.
Moreover, the abundance of new housing supply and developers’ aggressive pricing strategies have kept second-hand property prices under pressure. Banks, in turn, have become increasingly cautious in their valuations, further contributing to the negative equity problem.
The surge in negative equity cases is not just a problem for individual homeowners; it has far-reaching implications for Hong Kong’s economy as a whole. Property has long been a cornerstone of wealth creation in the city, with many residents viewing real estate as their primary investment vehicle. The current downturn threatens to erode this wealth, potentially leading to a decrease in consumer spending and overall economic activity.
Furthermore, the real estate sector’s struggles could have knock-on effects on Hong Kong’s banking system. While the HKMA maintains that the asset quality of residential mortgage loans remains healthy, with a low delinquency ratio of 0.09%, the sheer scale of the negative equity problem raises concerns about potential systemic risks if the downturn continues or worsens.
In response to the prolonged market slump, the Hong Kong government has taken steps to stimulate the property market. In February, it announced the removal of all property cooling measures, a move aimed at reinvigorating buyer interest. However, the impact of these measures has been limited thus far, with home prices showing only a modest 1.06% increase in March after 11 consecutive months of decline.
Looking ahead, market analysts remain cautious about the prospects for a swift recovery. Tso of mReferral suggests that the number of negative equity cases is likely to fall only in the second half of the year, and even then, the decline may be gradual. This cautious outlook is based on several factors, including:
- Persistent high interest rates: With the U.S. Federal Reserve signalling a potentially prolonged period of elevated rates, borrowing costs in Hong Kong are likely to remain high in the near term.
- Abundant supply: A backlog of new home supplies continues to weigh on the market, with developers offering competitive prices that keep pressure on second-hand property values.
- Economic uncertainty: Ongoing geopolitical tensions and global economic headwinds continue to dampen investor sentiment in Hong Kong’s property market.
Behind the statistics and market trends lie the personal stories of thousands of Hong Kong residents grappling with the reality of negative equity. For many, the dream of homeownership has turned into a financial nightmare, with the value of their properties now worth less than the outstanding mortgage.
Take, for example, the case of Sarah Wong, a 35-year-old marketing executive who purchased a 500-square-foot apartment in Kowloon in 2021. “I thought I was making a sound investment for my future,” she says. “Now, I’m stuck with a mortgage that’s worth more than my home, and I feel trapped. It’s not just about the money; it’s the stress and anxiety that come with it.”
Stories like Wong’s are becoming increasingly common across Hong Kong, highlighting the human cost of the property market’s downturn. For many, the negative equity situation has forced a reassessment of life plans, from delaying starting a family to putting off career changes or further education.
The property market’s struggles are sending ripples through various sectors of Hong Kong’s economy. The construction industry, a significant employer in the city, has seen a slowdown in new projects as developers become more cautious. This has led to job losses and reduced economic activity in related industries.
Moreover, the wealth effect associated with rising property values has long been a driver of consumer spending in Hong Kong. As home prices continue to fall, there’s a risk of reduced consumption, which could further dampen economic growth.
The banking sector, while currently stable, faces increased scrutiny. Dr. Andy Kwan, Director of ACE Centre for Business and Economic Research, warns, “If the property market downturn persists or worsens, we could see an increase in loan defaults, putting pressure on banks’ balance sheets. This could lead to tighter lending conditions, creating a vicious cycle that further depresses the property market.”
The Hong Kong government finds itself in a delicate position as it seeks to address the property market crisis without resorting to measures that could be seen as artificially propping up prices. The removal of cooling measures in February was a significant step, but some argue that more needs to be done.
Legislator Paul Tse, who represents the real estate and construction functional constituency, argues for more aggressive intervention. “The government should consider providing targeted support to first-time homebuyers and those in negative equity,” he suggests. “This could include mortgage relief measures or subsidies to help prevent defaults and stabilize the market.”
However, such measures are not without controversy. Critics argue that government intervention could distort market forces and potentially lead to moral hazard. There’s also concern that aggressive support for the property market could exacerbate Hong Kong’s already significant wealth inequality.
International investors, once eager to tap into Hong Kong’s property market, have become more cautious. This shift in sentiment is reflected in the commercial real estate sector, where vacancy rates in prime office spaces have reached historic highs. The negative equity crisis is symptomatic of broader challenges facing Hong Kong. It’s not just about property values; it’s about the city’s ability to reinvent itself in a changing global landscape.
While the current outlook for Hong Kong’s property market is challenging, several potential recovery pathways are emerging. Efforts to diversify the economy beyond its traditional strongholds of finance and real estate could foster new growth areas and employment, thereby stabilising the property market in the long term. Additionally, fostering closer economic relationships with cities in the Greater Bay Area could attract more investment and talent to Hong Kong, enhancing the property sector. Investing in technology and innovation may also reposition Hong Kong as a hub for smart city developments, creating fresh demand in both residential and commercial real estate sectors. Moreover, streamlining regulations and enhancing transparency could restore investor confidence and attract buyers both locally and internationally. This critical juncture represents a watershed moment for Hong Kong’s property market and its broader economic trajectory, heavily influenced by the responses of policymakers, industry leaders, and the community to this unfolding crisis.
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