March 30, 2023

Choi Hung Estate in Hong Kong
An aerial view shows the Choi Hung public housing estate and other residential buildings with Lion Rock Peak in the background on June 3, 2021, in Hong Kong, China. Photo taken by a drone on June 3, 2021

When Stephanie Cheung bought a small, two-bedroom apartment as an investment for HK$7.7 million ($981,041) in April 2021, she booked a 6% gain over the summer as Hong Kong’s property market reached historic highs.

The price rally was driven by optimism that Hong Kong’s borders will reopen after some of the world’s strictest COVID-19 measures in the past two and a half years.

Today, none of this has been implemented.

The price of Cheung’s 450 sq ft flat has fallen by 6%, and the HK$16,300 rental income is no longer enough to pay the mortgage after monthly interest increased by HK$2,400 a few months ago.

“I bought hoping to save capital, but now I wanted to use the shortest time and the smallest loss to sell this apartment,” said Cheung, 40, who lives in a large rental apartment with his family.

Cheung’s is not an isolated incident as rising mortgage costs and a bleak economic outlook have deepened pessimism among homeowners.

This creates a significant policy headache for the city’s new leader, John Lee, who must balance the demands of various sectors of society. Lee delivered his first policy address in October.

“John Lee needs to keep property prices under control for grassroots and young people, although he cannot let prices crash because that would threaten the wealth of the middle class,” said Dave Ma, chief operations officer of realtor Hong Kong Property Services.

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

Cheung is now set for bigger losses after some banks raised their interest rates by 12.5 basis points on Thursday, the first increase in four years.

mortgage stress

Hong Kong homebuyers have enjoyed ultra-low rates for years and many mortgage plans are linked to floating interbank rates, which were originally below 1% in 2021 and between 2009-2016.

As interbank rates hit a more than 28-month high in August, effective mortgage rates rose slightly to around 2.6% from 1% earlier this year.

Hong Kong interest rates tend to move in lockstep with US rates, as its currency is pegged to the greenback, putting upward pressure on interbank and mortgage rates.

High borrowing costs are dampening homebuyer sentiment.

House prices in the financial city fell 4.5% in the first seven months to December, while transactions fell 40% year-on-year in the first nine months.

Property agents said prices have fallen by more than 7% so far this year, not seen since the third quarter of 2018.

“The profit of the last four years has been wiped out in four months,” said the realtor’s mother.

Many vendors are leaving Hong Kong for good or residents are forced to cash in to help struggling businesses.

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

Ma said the market could stabilize in the near term if the government lifts travel restrictions with mainland China and overseas and eases stamp duty on second home purchases and foreign buyers.

Momo Chan, 35, a civil servant who bought a house last April before getting married, also said reopening the border was crucial to supporting the housing market.

“I expected interest rates to go up and the market not to go up, but I thought it would be stable, not as big a drop as it has been in the past few months,” Chan said.

($1 = 7.8488 Hong Kong dollars)

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