Post-Covid, life has not yet reached the new normal, according to this writer.
Some readers will know that I relocated from Hong Kong to the UK in early March. I have to say that it was a traumatic experience, not to put too fine a point on it. There are two main reasons why it was so. First, I have spent my entire working life in Asia, mostly in Hong Kong, but also in Singapore and the Philippines, thus making departure something of an emotional wrench, leaving behind many friends and indeed family. Second, leaving at what seems now with hindsight to have been ‘peak Covid’ made the experience far more stressful than it needed to be. The details are unimportant, and in the greater scheme of things, are de minimis when one reads the news from Ukraine. So, like a frog which has escaped boiling water, I look back now at Hong Kong with a new perspective and wonder how the city will fare.
Let’s start with the property market outlook, which is as common a dinner party topic in Hong Kong as it is in London. One thing I have long learned is not to bet against the Hong Kong property market, however dire the circumstances seem to be. For those unaware, Hong Kong home prices more than doubled over the past 10 years, reaching an all-time high in September 2021. Not that this is exactly something to boast about, since it makes Hong Kong the most unaffordable housing market in the world and glosses over some uncomfortable home truths about the number of people living below the poverty line and the lengthy waiting lists for public housing.
“What is truly remarkable is that prices have remained stable despite the Covid pandemic of the past two years and the worst civil disobedience in a generation in 2019”
The reasons for this staggering price growth are complex but, to my thinking at least, principally revolve around an inept government housing policy (providing insufficient land for both private and public housing development), coupled with strong demand (domestic population growth and arrivals from China) and a set of Hong Kong developers who have been intent on squeezing the pips out of the market. Sorry, ‘maximising shareholder returns’. What is truly remarkable is that prices have remained stable despite the Covid pandemic of the past two years and the worst civil disobedience in a generation in 2019.
So, is the Hong Kong property market indestructible? Not entirely, because some pretty strong headwinds have emerged. The first to raise its ugly head is the spectre of higher interest rates. A recent report published by Goldman Sachs talked about a 20% decline through to 2025 on the back of weaker household incomes and rising interest rates. It’s worth pointing out that the Hong Kong dollar is pegged against the US$, which effectively removes interest rate control from the HK government’s policy arsenal. US interest rates are rising, albeit off a low base, and this must surely impact affordability in Hong Kong. Indeed, year-to-date prices have already softened slightly. One other factor to bear in mind is that global quantitative easing is turning to quantitative tightening. Governments have been printing money like mad and it seems to me that it often flows straight into asset markets, property included, puffing them up to levels way beyond where they should be. If the taps are turned off and the tide recedes, some ships are going to be left high and dry.
Turning to the supply and demand equation, the former seems still bogged down in the inertia of a slow, long-term government planning process, so is unlikely to change in the short to medium term. As an aside on this topic, I do find it fascinating that the government miraculously found vacant sites for emergency development of large Covid quarantine centres. Yes, these are temporary, low rise, ‘camp-style’ structures, but all the same, now that the worst of Covid has passed, could they not now be used to fulfil temporary housing needs? Could they not be used to alleviate the misery of ‘caged home’ dwellers in the urban area? Just a thought.
Demand looks less certain than in the past. Household formation is slowing for demographic reasons (ageing population, lower birth rates) and notably now because of an exodus of Hong Kongers unhappy with what they feel is draconian National Security legislation aimed at stamping out the pro-democracy movement behind the protests of 2019.
According to a survey by the University of Oxford’s Migration Observatory, 186,000 Hong Kongers applied for BNO entry visas in 2021, with an estimated 380,000 more to apply in the next five years. This should surely dent future housing demand, given that the first wave of Hong Kong migrants to take up the scheme have so far tended to be educated professionals arriving with families.
“With cross-border travel reduced to a trickle, one leg of the property market stool looks a bit wobbly”
The other aspect to all of this is that mainland China’s Zero Covid policy looks set to run and run. The backdrop to the situation Hong Kong finds itself in now is that China’s population has been vaccinated with a vaccine of questionable efficacy. The fact Covid has yet to run its course in a country with a population of 1.5 billion is quite alarming for the global economy. Hong Kong’s raison d’etre is the access it provides to China’s fast markets. But with cross-border travel reduced to a trickle, one leg of the property market stool looks a bit wobbly. In my view we will be well into 2023 before any sort of real normality returns to Hong Kong.
The more I see of life in the UK, now emerging from the ravages of the Covid pandemic, the more I think that a simple operating assumption is that if it has taken two years to get through the worst of Covid, it will take possibly another two years for ‘normality’ to fully return. On that basis, with Covid yet to run its course in China, it might be 2026 before the dust settles. Oh, dear.
In conclusion then, my high-level examination of the tea leaves tells me that the Hong Kong residential property market is in for a torrid time. In 2023 we will be looking back at an extraordinary five years where we will have seen enough black swans to overcrowd an aviary – street protests, the Covid pandemic, crisis in Ukraine, supply-chain shocks, inflation pressures and interest rate rises.
On the basis that opportunity flows from crisis, surely then it will not be long before it’s time to buy?
