(Bloomberg) – On a recent Saturday, more than 100 vendors crowded the floors of a luxury shopping mall in Hong Kong, haranguing shoppers to check out deals at one of the city’s newest residential projects.
One Innovale – Bellevue, built by Henderson Land Development Co., has sold its first batch of apartments for 9% less than neighboring second-hand homes in the New Territories, about 40 km from the central financial district. But the response has been below average since its launch last month: around a third remained unsold by the first week of October.
It’s even worse for others. By the end of the first day of listing, a 139-unit development had failed to move a single unit – rare for a city where projects are snapped up within hours in a robust market. Another widely advertised project only found buyers for two units throughout the day, according to sales records.
“We are struggling to get fewer customers due to interest rate concerns,” said real estate agent Sam Wong. “Everyone is competing to be cheaper.”
The drop in demand shows how a city at the forefront of a global housing downturn is bracing for an even deeper slump in the months ahead as interest rates rise. Higher borrowing costs are weighing on an economy already battered by population out-migration, Covid restrictions and political unrest caused by Beijing’s tightening control. Goldman Sachs Group Inc. sees home prices fall 30% through 2023 from last year’s levels, while Jefferies Group LLC predicts further declines after falling 8% this year. The secondary market is approaching its lowest level in five years.
Real estate has remained at the center of the HK$368 billion economy, driven mainly by the wealth created by high valuations, a result of the territory’s scarce land resources. Seven of the city’s 10 wealthiest local tycoons built their fortunes on the property. Home ownership is an important indicator of success for Hong Kong residents, who have seen it as a safe bet after a two-decade bull run. A declining market threatens to hurt that sense of well-being, which could indirectly weigh on spending.
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Latest data from the Hong Kong Monetary Authority – which has raised benchmark rates five times this year – shows that mortgages approved in July fell 22.1% from June and 3.9% in August from month to month. Those who finance secondary market transactions, in particular, fell 30.3% in July and another 11.1% in August.
The hawkish signals from US Federal Reserve officials mean further interest rate hikes are also likely in Hong Kong. The HKMA moves at the same pace as the Fed as the local currency is pegged to the greenback. Last month, the city’s banks, including HSBC Holdings Plc and Standard Chartered Plc, raised their key lending rates for the first time since 2018. They also raised mortgage price caps for Hibor-linked loans, to which 97% of Hong Kong home buyers are bonded.
Hong Kong’s economy could potentially contract this year, with the city lowering its annual economic forecast twice and Finance Secretary Paul Chan warning of a budget deficit that is double the budget estimate.
“A higher interest rate generally contracts economic activity, especially given the already weakened demand in Hong Kong due to the pandemic and control measures,” said Aries Kin-Ming Wong, who teaches l Economics at Hong Kong Baptist University. “This may have an even greater impact on property markets as the recent wave of emigration has already put downward pressure on prices.”
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The city’s dwindling workforce and diminishing appeal to mainland buyers have also added to the woes. Strict Covid quarantine requirements, which were in place until recently, have led to a brain drain, with official figures showing a record drop in population.
Beijing’s tightening grip has also tarnished Hong Kong for wealthy mainlanders seeking to protect their assets. Instead, they’re eyeing places like Singapore, Australia, and California.
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Despite lower prices, accessibility is not improving. In fact, the city’s apartments are on track to become the least accessible to buyers for 24 years due to a tight monetary environment.
A 250-square-foot studio, smaller than an average parking lot, sells for more than $500,000 in the emerging middle-class neighborhood of Kai Tak. With that kind of money, one can buy a unit near Soho in New York.
“Everyone can feel the market is deteriorating – interest rates keep rising and the local economy is not doing very well,” said Greg Cheung, 37, who is looking to buy a home in Hong Kong. for a few years. “I have less desire to buy now.”
Unless home values fall 15% to 30% from their all-time high, the current price does not warrant a purchase, Cheung added.
The high proportion of financial sector workers in Hong Kong also makes the city more vulnerable to Wall Street layoffs. Giants like Goldman Sachs and UBS Group AG have begun cutting jobs in the region, in part due to a slowdown in China that has hurt trading.
“Sellers have to drop their prices multiple times before buyers will accept a deal and many of them are discouraged,” said Jason Hau, who works for Centaline Property Agency Ltd. “It wasn’t as bad even during the 2008 financial crisis.”
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