As property market transactions dwindled in Hong Kong, leading developer CK Asset Holdings Ltd. (01113. HK) launched a new property, The Coast Line II, at a “bargain price.” The overall weakness in Hong Kong property prices has continued, with an average rental yield of only 2.7 percent, lower than the roughly 4 percent offered by a one-year fixed-term bank deposit, which has deterred many property investors. According to the latest data from Midland Realty’s Residential Department, only 6,843 transactions were recorded for new properties in the first seven months of 2023, marking the second-lowest in the past decade for the same period.
The current round of interest rate hikes has further increased the burden on small property owners in Hong Kong. Calculated on a loan amount of HK$1 million (US$ 128,000) over 30 years, the effective interest rate in the low-interest rate environment at the beginning of 2022 was approximately 1.45 percent. This resulted in a monthly interest repayment of HK$3,428 (US$438). However, with the current effective interest rate expected to reach the capped rate of 3.625 percent, the monthly interest repayments will increase to HK$4,561 (US$583), an increase of 33 percent.
With Hong Kong’s property market on a downward trend, investors are less inclined to invest in real estate and are channeling funds to banks for higher-yielding fixed deposits. Yeung Ming-yee, senior associate director at Centaline Property Research, pointed out that while the summer holiday period led to an increase in rental prices, pushing up the average rental yield for the third quarter to 2.7 percent last month from 2.6 percent in May, current mortgage rates are still close to the ceiling rate. This means that bank mortgage rates are almost 1 percent higher than rental yields, indicating that rental returns for property owners are insufficient to offset the interest rate differential in the cost of owning property. This makes it difficult to attract investors for rental property investments and support property prices.
It’s undeniable that current rental yields are relatively low. Taking the example of the new property “La Marina” in Wong Chuk Hang, which was completed in May, an owner purchased Unit D on the lower floor of Block 2A for around HK$28.603 million (US$3.659 million) in September 2021. The unit has a saleable area of approximately 921 square feet. The owner has recently successfully leased it for HK$40,000 (US$5,116) per month, generating an annual rental income of HK$480,000 (US$61,400) and a rental yield of around 1.7 percent. Even if the rent is increased by 50 percent to HK$60,000 (US$7,765), the rental yield would only be around 2.5 percent. To surpass the roughly 4 percent interest rate offered by a one-year fixed deposit in banks, property prices would need to drop by 40 percent to HK$17.162 million (US$2.195 million) while maintaining the high rent level of HK$60,000 (US$7,765).
According to the latest report from the international research institute Demographia in 2023, which compared median home prices and median family incomes in eight countries, including China, Singapore, the United Kingdom, the United States, Australia, Canada, Ireland, and New Zealand, to assess the affordability of homeownership for citizens. The higher the value, the harder it is for citizens to afford property. Hong Kong has been ranked as the world’s least affordable city to buy property for 13 consecutive years, with a median multiple of 18.8, meaning that Hongkongers would have to save their entire salary for 18.8 years to afford a property.
Compared to other international financial centers, such as New York, London, and Singapore, it is much more difficult for local citizens to buy property in Hong Kong. Among these three cities, London ranks 18th with a median of 7.3, New York ranks 19th with a median of 7.1, and Singapore, Hong Kong’s main competitor, ranks 48th with a median of only 5.3. Assuming median incomes remain constant, even halving Hong Kong’s property prices would not make it as attractive as London.
Based on the above analysis of rental yields and affordability ratios, Hong Kong property prices need to decline by approximately 40 percent to 50 percent. At present, the Hong Kong property market remains calm, influenced by the difficult affordability of properties for young people to accumulate down payment funds, the large number of unsold new properties that developers are trying to sell at a discount to maintain sales volume, and the continuing emigration trend, which increases the supply of second-hand properties and puts pressure on property prices. Not surprisingly, CK Holdings has been willing to undercut property prices to lure in capital.
