Reviewing the Predictability of the Past 3 Falls of Hong Kong Housing Prices

Last week, I have reviewed the accuracy of my forecasts for the global recession (Yiu, 2020), this article is another review of my forecasts for the housing price changes in the past 13 years.

There were only three falls of property prices in the past 13 years in Hong Kong, namely in 2009, 2016 and 2020, based on the negative Year-on-Year change of the Composite Housing Price Index constructed by the Rating and Valuation Department of the government (Figure 1).

The reasons for the three falls were the Global Financial Crisis 2008, the Normalisation of the US interest rates 2015, and the Global Economic Recession 2020. The rest of the time is all positive growth, and the peaks of the growth rate have reached above 30%!

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Figure 1 Hong Kong residential property price index annual change rate, 2017–2020. Source: Rating and Valuation Department

However, the breadth and depth of the declines are relatively short and shallow, the deepest one was less than 15%, and the longest one was only about one year, which may make many people think that the declines in property prices are good timing to buy. No wonder even under such an adverse situation of the COVID-19 pandemic and the Global Recession particularly in May 2020, there were still 5984 transactions! This is more than double of 2762 cases in January when the pandemic was not yet known. Buyers dare to take the risk of being infected COVID-19, just to buy some price-falling flats. It may reflect the belief that only speculations can earn a fortune in Hong Kong!

Admittedly, however, property prices can go up or down, and the past does not necessarily imply the future. Accurate forecasting requires a robust theoretical basis and strong empirical evidence. Let me first review my forecasts for the changes in housing prices in the past 13 years to review the predictability and accuracy of the forecasts.

First, during the 2008 Global Financial Crisis, property prices in Hong Kong fell rapidly after the turmoil. However, at that time, a reporter from a financial newspaper saw my article published in an international peer-reviewed journal (Yiu, 2009) which put forward a “Negative Real Interest Rates” NRIR Hypothesis on the determinant of housing price changes in Hong Kong. He came to me for an interview and asked that during the time of plummeting, how come would I suggest that the housing price would soon revert back to a housing bubble? I pointed out that as the US Fed’s QEs and the linked exchange rate in Hong Kong, the real interest rates entered into the negative zone again, and thus I predicted that property prices would return to the rising cycle again. The interview titled “The Return of Negative Real Interest Rates, the property market is brewing bubbles” (HKET, 2009).

Referring to Figure 1, the prediction was confirmed by fact that the housing market has entered into a 7-year long track of unfailing rising prices. The index has risen from 104.8 in December 2008 to 306.1 in September 2015, representing a 92% increase in 7 years!

But then in 2014, invited by Mr. Luk, I was interviewed for his book “The Game in the Real Estate Market, the Winner is King”. The article for my interview is titled “The Effect of Negative Interest Rates on Housing Prices is of High Predictability Power” (Luk, 2014) (Figure 2). At that time, as the Fed began to reduce the purchase of debt and kicked start the normalization of interest rates, he quoted my prediction statement as follows:

“The reduction of US$10 billion in debt purchases after each Fed meeting has made the policy more transparent and the impact on interest rates more predictable. This has also allowed the Hong Kong property market to cool down gradually until QE ends in 2015, when the negative interest rate regime is expected to be completed, and property prices are therefore believed to be reducing (adjusted) steadily.” (Luk, 2014, p. 67)

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Figure 2 Property prices are closely related to negative interest rate expectations, source: Luk (2014)

Looking back with hindsight by comparing it with Figure 1, it is an accurate prediction that matches the steady decline of the index’s annual changes from 21.4% in April 2015 to -8.3% in June 2016, i.e. the total magnitude of YoY change is 29.7%. It becomes the second housing prices fall in this period.

Since the end of 2015, I participated in several rounds of political elections, including the 2015 District Council elections, the September 2016 Legislative Council elections, and the March 2018 Legislative Council by-elections. In this 3-year period, I have made several warnings of a Global Recession not only in the newspapers (Yiu, 2016) but also in the Chamber of the Legislative Council (recorded in Yiu, 2017).

For example, in Yiu (2016) I wrote in Ming Pao Daily that Hong Kong will enter an economic recession and the fiscal deficit crisis will emerge. The government will inject huge money to save the economy:

“The current economy is entering a recession. Once the unemployment rate increases, the rescue of the economy becomes urgent. The government will try to overspend substantially for its own interests.” (Yiu, 2016)

This prediction is unfortunately accurate! The Hong Kong Financial Secretary does not only have to distribute HK$10,000 (about US$1250) to each adult in June, but he also spent tens of billions of dollars to rescue private and listed companies such as Ocean Park and Cathay Pacific.

The following is a direct quote of my speech in the Legislative Council giving a warning on the coming economic recession within five years. I urged the government to reduce unnecessary large-scale infrastructure expenditures and avoid long-term structural fiscal deficits.

“It is important to note that in the next five years, there will be a recession crisis in Hong Kong. Once the economy declines, land sales revenue will decrease, but the expenditures from the Capital Works Reserve Fund on public works projects will not be able to suspend. There will be a big deficit. If we are not properly keeping our current account surplus, then when the tax revenue drops (the alarm rings)…” (for the full speech, please refer to Yiu, 2019)

The recession has come just after 2 years of my speech, and Hong Kong is the earliest in the world to enter recession. (Yiu, 2019) The GDP declined in the first quarter of this year broke the record low (the real GDP quarterly change was -5.3%). The unemployment rate sharply upsurged.

It is not just a minor recession in Hong Kong, but it is a Global Recession, and a recent World Bank (2020) report, Global Economic Prospects, even warns that it will be the deepest recession since the end of World War II, with “the overall global economy expected to shrink 5.2% this year”.

In 2017, my team and I published a new book entitled “Choose our Future, Hong Kong 2030+”. I wrote a preface titled “Hong Kong’s Six-sided Bubble Bursting Theory” (Yiu, 2017). The theory analyzes the dire situations in six major bubble bursting areas, including “property markets explosion”, “economic explosion”, “financial markets explosion”, “people’s livelihood explosion”, “resource explosion” and “environmental sustainability explosion”. Many of these warnings have become a reality today.

My last warning before the most recent decline of housing prices was made in February 2019 at an interview invited by Apple Daily (2019) to discuss the question “is the housing demand inelastic?”. My response was that housing demand is elastic, consumers and investors would choose not to buy when they expect a housing price plummet. This warning was made in less than five months before the third decline of housing prices in the past 13-year.

In fact, there have already been many signs of recession at that time, including the falls of imports and exports due to the trade war between the United States and China since 2018. It then coupled with the government’s amendment bill of extradition in 2019, it has caused social unrest. Then the outbreak of the pneumonia in Wuhan, China, since February 2020, it spreads to the whole world, including Hong Kong. The lockdown renders the closure of border, shops and businesses. Worse still the Chinese government further decided to enact the Hong Kong version of the National Security Law, which was opposed by many governments around the world, condemning that the move seriously undermines the Basic Laws and violates the Sino-British Joint Declaration. Then the US government warns that sanctions will be taken including the retrieval of some of the privileges granted by the US-HK Policy Act.

Figure 1 clearly shows that the annual change of the housing price index has been declining since July 2019. It is the third time in the past 13 years that it enters into the negative zone. How long and how deep will the market fall this time?

In fact, going back to the interview in February 2019, I have already mentioned that it is difficult for Hong Kong’s property prices to soar in the next few decades as rigorous as in the past few decades (Apple Daily, 2019), but this kind of prediction may sound too long-term that readers may want to have a shorter-term prediction, so I wrote a short article (Yiu, 2020) at the invitation of Apple Daily in March this year to analyze the short-term housing market trend from three aspects. Due to the decline in demand, expected deflation and the huge reduction number of tourists, plus the above 5 tension forces (trade war, social unrest, pandemic, National Security Law, sanctions), it is the market consensus that housing prices will continue to fall in the short term.

For the analysis of mid- to long-term price changes, it will be continued in another article.

#housingprice #forecast

HKET (2009) 〈負利率將重臨,樓市醞釀泡沫〉,《經濟日報》Oct 28, 2009

Luk 陸振球 (2014) 樓價與負利率預期的關係密切,《樓市博弈,勝者為王》,66–67,香港:明報出版社

World Bank (2020) Pandemic, Recession: The Global Economy in Crisis,

Yiu, C.Y. (2009) Negative Real Interest Rate and Housing Bubble Implosion — an empirical study in Hong Kong, Journal of Financial Management of Property and Construction 14(3), 257–270.

Yiu, C.Y. 姚松炎 (2016) 從灰色到綠色凱恩斯經濟政策,明報,1月31日。文摘/article/20160131/s00022/1454205911292/從灰色到綠色凱恩斯經濟政策- (文-姚松炎)

Yiu, C.Y. (2017) Amendments to the Appropriation Bill 2017, OFFICIAL RECORD OF PROCEEDINGS Thursday, 11 May.

Yiu, C.Y. 姚松炎 (2017) 《香港六面爆煲論》,序,《選擇·未來──《香港2030+》民間替代方案》,4月,土地教育基金。 網頁:

蘋果日報 (2019) 金融中心 — 姚松炎:剛性需求如傻人需求,港樓狂升難複製,2月10日。

Yiu, C.Y. (2019) Global Recession is Imminent, HK Government Launches Unorthodox Measures, Medium, Oct 20.

Yiu, C.Y. 姚松炎 (2020)【財經論壇】港樓勢危 樓價下跌四大原因,蘋果日報,3月25日

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ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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