Luxury price growth moderates

• External uncertainties including the COVID-19 situation, prolonged border closure, stock market turbulence as well as various Mainland policies acted together to cool luxury residential sentiment in the last quarter of 2021
• Luxury volumes declined dramatically in Q4, particularly in the range of HK$20-HK$50m price bracket, with the noticeable exception of the HK$100m+ market as large houses and redevelopment sites remained in demand
• The mass market also saw prices enduring a bumpy ride in Q4, with affordability reaching 56.8%, a new high since the 1999 period
• Looking ahead, luxury market sentiment will be mixed, with border closures, emigration and capital outflows, as well as possible rate hikes likely challenges in the first half of 2022. 

Luxury sentiment cooled by external uncertainties in Q4

The latest worsening of COVID-19 situation, prolonged border closures hindering the flow of Mainland capital to Hong Kong property market, the stock market turbulence, and policies restricting PRC interest in investing into the local luxury property market have all made a dent on the luxury market sentiment.

Luxury price growth moderated in Q4/2021 across most districts as a result. For 2021 as a whole, townhouse prices increased by 5%, while luxury prices on Hong Kong Island, Kowloon and the New Territories rose by 10%, 4% and 6% respectively.

Luxury volumes declined dramatically in Q4, with 618 transactions (HK$20m or above) recorded, 39% lower than in Q3. In the HK$20m to HK$50m price bracket, in particular, transaction volume declined by 41% QoQ, representing weakening demand in this entry level. Nevertheless, for the more affluent groups, their buying appetite has been less affected, with transaction volumes of HK$100m or above only declining by 20% over the same period.

Luxury site sales and implications on supply

Though there were no mega deal (HK$1 billion or above) recorded over the quarter, the sale of two properties with redevelopment potentials (63-67 Robinson Road and 89-93 Tai Hang Road) reflected developers' appetite for redevelopment opportunities. Elsewhere, a single number lot house at 38 Coombe Road on the Peak was sold for around HK$120,000 per sq ft saleable, while a few other houses in Southside and Mid-Levels were sold for close to HK$100,000 per sq ft saleable, showing that these rare and prestigious houses are still highly sought after.

The tender of the Repulse Bay Road site in Q4/2021 was the third super-luxury site tendered in a year, after the two Mansfield Road sites on the Peak sold in late 2020 / early 2021 but was the first in Southside in more than five years. The site located on South Bay Road, Repulse Bay (RBL 1206) has an area of around 21,173 sq ft and a maximum developable GFA of 19,055 sq ft. With the market estimating accommodation values from HK$50,000 to HK$75,000 per sq ft, beating the record set by the Mansfield Road site, the successful disposal of this site may speed up luxury land supply in the coming year.

Mass market sluggish

The mass market also saw prices enduring a bumpy ride in Q4, with values declining by 0.2% across the board. As the economy has not yet entered full recovery mode and with income growth constrained, the private housing affordability ratio reached 56.8% in Q3/2021, a new high since the 1999 period and above the 25-year historical average. Residential mortgage debt reached HK$1,720 billion in November 2021, an all-time high, representing 15.7% of total banking loans, also a record level since the Global Financial Crisis in 2007-09.

Noting the trend of new developments in urban areas having increasingly small unit sizes, with some as small as a car parking space (around 100 to 150 sq ft), the government has begun tackling this issue by setting a limit to unit size at 280 sq ft for its latest Tuen Mun site tender in Q1 2022, with another MTR site likely to follow suit. How well will developers take into this new concept would have an impact on the size of apartments to be built over the next few years.

Market outlook

The demand profile for super luxury homes in Hong Kong is gradually shifting: while three to five years ago only local and Mainland traditional HNWIs were buying trophy assets, over the past few years we have seen more 'emerging affluents' who have made their fortunes in the New Economy, either via trading cryptos, NFTs or running successful start-ups often using A.I. and metaverse related technologies. Popular assets have included luxury cars, watches, antiques, art pieces as well as super luxury properties.

After global QE from 2009 the local economy was awash with liquidity, taking real interest rates into negative territory, one of the key factors supporting the luxury price rally of the past decade. Although the US is likely to raise interest rates this year to tackle inflation, increases are expected to be moderate. According to Oxford Economics, short term interest rates in Hong Kong could rise from 0.19% in 2021 to 2.04% in 2025, while inflation should remain at around 2% to 3%. This suggests that the negative real interest rate environment may persist until at least 2025, supporting future luxury price levels. Coupled with limited supply, luxury prices may experience some small adjustment (in the order of 5% or less) in the first six months of 2022, before resuming growth of 3% to 5% in the second half of the year.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "The latest Omicron setback may delay border reopening, while further policy changes in the Mainland remain likely, hindering HNWIs from investing overseas. The negative real interest rate environment, as well as limited upcoming supply are two positive factors supporting luxury values in 2022."

Ms. Cherrie Lai, Senior Director, Head of Residential Sales of Savills said: "Luxury market sentiment in 2022 will be mixed, with border closures, emigration and capital outflows, as well as possible rate hikes likely in the first half of this year, but the limited supply will give support to the price levels."