The Post-COVID Economy 2 — Real Estate Prices Fall

Hong Kong has been impacted by three consecutive blows, including the U.S.-China trade war, the anti-extradition social movement, and the global pandemic of COVID-19 since 2019. A coming global economic recession is inevitable. Real estate demand has got an unprecedented hit, especially the retail stores due to the social distancing and restrictions of tourists. The price of retail properties has dropped by about 10% in February this year (annual change). The price of office buildings has also dropped by about -8.5%, but the response of the housing market is slow, and it has just begun to turn south. Once again, the synchronized real estate price changes confirm what I have been proposing the theory that the rise and fall of real estate prices in Hong Kong are largely irrelevant to property supply, but rather an asset price bubble caused by real interest rates (money supply) and global capital flows. Therefore, despite the different supply and demand for various types of property, they often comove.

The total retail sales amount in February fell by -44% (annual change). The market has frozen. Real estate investors normally consider the returns and risk ratios of various investment tools, that is what the economists call the CAPM model. Now when rents fall, if other factors remain unchanged, but the risk of property investment has increased sharply, retail asset price would be adjusted downward.

Figures 1 and 2 show the annual changes in retail store rental index (RRI) and price index (RPI) in the past 20 years. their co-movements are vividly clear, but the volatility of rent is less than that of the price, reflecting the effects of other factors such as real interest rates and capital flows on the price changes. Among them, after the Asian financial turmoil in 1999, store rents decreased by up to -17.4%, while prices decreased by up to -48.7%, nearly 3 times that of rent! In February this year, the store rent has fallen by -6.2% and the price has dropped by -10.8%. This figure mainly reflects the impact of the previous 2 events, and still does not fully reflect the impact of the COVID-19. Admittedly, the retail store prices in Hong Kong have increased more than 5 times in the past 20 years, even if it falls by half, it is only back to the 2010 price level.

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Figure 1 annual rate of change of Hong Kong retail store rental index (RRI) and price index (RPI)

In fact, there is a similar relationship in the housing rental index and price index. Figure 2 shows that the changes in housing rents in the past ten years which are also synchronized with the price index changes. However, due to data lag and government interventions in the housing market, the price changes of housing is normally slower than other property markets. In February this year, the housing price index is still in the positive zone, whereas the rental index has just crossed the x-axis to the negative.

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Figure 2 Annual change rate of Hong Kong private residential rental index (red line) and property price index (blue line), Source: Rating and Valuation Department

Last week I wrote an article in the Apple Daily (Yiu, 2020) explaining that in addition to the falling rent, there are other three attributes that also drive the real estate rent and price down. First, tourists have disappeared, consumption has plummeted, and a large number of social activities have stopped, the unemployment rate has soared. Some citizens and investors need to sell their assets to cash out and reduce liabilities. When employees and investors foresee the uncertainties and unstable income in the near future, they will inevitably adjust their property investment and home purchase plans so as to reduce debt. The demand for property has decreased. Coupled with the sharp increase in the mortgage-refinancing over the past few years (Yiu, 2019), once the property price decreases and/or income decreases, some of the heavy debtors are forced to default or strategically choose to default, resulting in more forced sales, which will further push down property prices.

Third, when the market expects deflation, even if the interest rate is reduced to zero, the real interest rate is still positive. The borrowing cost of real estate investment is no longer attractive, the monthly mortgage payment exceeds the rent, funds will leave the real estate investment market.

Finally, in the past, due to the continuous increase in the number of tourists, the shortage of hotel rooms, and the birth of Airbnb by internet technology, it is estimated that tens of thousands of homes have been converted into short-term accommodation for tourists or expats. Now tourists are extinct, and even the hotel‘s occupancy rate falls to less than 50%, these Airbnb or housing units for short-term rentals naturally return to the ordinary housing rental market. The substantial increase in rental supply, and a large number of tenants have left for various reasons. Housing rent is adjusting downward as shown in Figure 2. It drives the housing price down.

The co-movements of prices and rents of various real estate sectors reflect the fact that the ups and downs of the housing price are not caused by the insufficient housing supply. The myth that housing prices would not fall because of the strong demand and the weak supply is now proved to be false.

In fact, in the past ten years, even when the housing supply has been low, and the vacancy rate of housing (based on the government statistics, which is not reliable) has also been very low, but during this period, housing prices and rents were still going up and down in synchronization with the cycles of other real estate sectors.

Since the U.S.-China trade war and the anti-extradition social movement, the growth rate of the housing price index has slowed significantly since 2019, and it has fallen into the negative region from July to October, but when the government changed the mortgage policy by allowing the loan-to-value ratio to 90%, the housing price index reverted upward, resulting in 4.8% and 1.0% growth in January and February this year. Yet, whether the government can turn the falling price back to the rising trend after the global pandemic and its subsequent economic recession is highly questionable.

In February and April last year, I forecasted that housing prices in Hong Kong may fall by 40% (Apple Daily, 2019; Yiu, 2019), and now it may come true. Unfortunately, the government did not listen to advice.


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。

姚松炎 (2019) 加按四年升258% 樓市風險大,信報財經月刊5月。

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

Yiu, C.Y. (2019) Excel Forecasts a 40% Plummet of HK Housing Price! Medium, Apr 15.

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

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