Both local and external uncertainties are dampening luxury residential market sentiment as volumes hit new lows and values begin to weaken, according to Savills in its Market in Minutes - Hong Kong Residential Sales report for Q1 2022.
- External events including Russia's invasion of the Ukraine, tougher US regulation of China tech stocks have hit the local stock market hard and dampened property investment sentiment in general, while the recent Omicron outbreak poses a further threat to the local luxury residential market
- Luxury volumes (over HK$50 million) declined dramatically in Q1 to 91, the lowest since the social unrest of Q3/2019, with the lower price bracket enduring the largest drop. Luxury prices softened by between 1.5% and 2.7% as a result
- Luxury sites in traditional luxury enclaves are still in demand with a South Bay Road site tendered for a record high average price of HK$62,355 per sq ft
- Stretched affordability and weak market sentiment all contributed to mass price adjustments in Q1, which declined by 2.4% across the board
- While the local COVID situation is largely contained, the lockdown of major Chinese cities may increasingly impact China's economy and Mainland HNWIs appetite for luxury properties in Hong Kong
- With the US Fed likely to increase interest rates more aggressively, the local negative real interest rate environment could be put to the test, though there is still some way to go before reverting to positive territory.
Luxury sentiment dampened with volume down to lowest level since Q3/2019
Events such as the Russian invasion of the Ukraine, stock market turbulence and the local Omicron outbreak in Q1 posed further threats to the local luxury residential market. The ongoing border closure with the Mainland and highly restrictive COVID measures have deterred both Mainland and local buyers from making purchasing decisions.
Luxury prices registered downward adjustments in Q1 across most districts as a result, with townhouse prices falling by 1.5%, while luxury prices on Hong Kong Island, Kowloon and the New Territories declined by 1.7%, 2.1% and 2.7% respectively.
Luxury volumes (over HK$50 million) declined dramatically in Q1 to 91, the lowest since the outbreak of social unrest in Q3/2019, which was a 20% QoQ drop from an already quiet Q4/2021. Similar to last quarter, less affluent buyers are affected the most, with volumes in the price bracket between HK$50 and HK$100 million declining by 25%. The super-rich were less affected, as volumes over HK$100 million registered only a 9% QoQ decline.
Record high price for South Bay Road tender reflects developer's appetite for luxury sites
Luxury sites in traditional luxury enclaves are still in demand with a South Bay Road site tendered for a record high average price of HK$62,355 per sq ft by SEA Holdings. The record price reflected developers' continued interest in exclusive super luxury sites, and their general confidence in the super luxury market in the medium term.
Stretched affordability in the mass market impacts marketability of homes
The mass market also saw prices enduring a drop of 2.4% in Q1, with Hong Kong Island experiencing the most severe decline (3.4%) among all districts as more professionals, both locals and expats, left the territory. Stretched affordability (58% as of Q4/2021) has hindered the sales of many second homes with many potential homebuyers struggling to pass the stress tests of bank mortgage lenders. This shortcoming could not be overcome even with the further relaxation of price caps of 80% and 90% LTVs under the Mortgage Insurance Programme to HK$12 million and HK$10 million respectively.
Weak market outlook
While the local COVID situation is largely contained, the lockdown of major Chinese cities, in particular Shanghai, may increasingly impact China's economy with implications for Hong Kong. The World Bank slashed China's 2022 GDP growth to 5%, lower than the country's 5.5% official target. These factors will weigh on sentiment and further diminish HNWIs' appetite for luxury properties in Hong Kong.
In the face of a looming rate hike cycle triggered by the US Fed's move to increase interest rate in March, local banks did not react to this rate hike as they still have abundant liquidity. As Hong Kong is expected to see mild inflation of 2% to 2.5% over the next couple of years, the negative real interest rate environment, which has helped to propel the city's longest residential price rally over the past decade, is likely to persist at least for the next two years.
Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "While the local COVID situation is largely contained, the lockdown of major Chinese cities will impact China's economy and Mainland HNWIs appetite for luxury properties in Hong Kong. Even with the US Fed likely to increase interest rates more aggressively given that US inflation (8.1%) is at a 40-year high, local real interest rates should remain in negative territory."
Ms. Cherrie Lai, Senior Director & Head of Residential Sales, Development & Investment, Prestige Home, Savills said: "Looking at the Land Sale Programme 2022-23, only five of the residential sites are new to the Government's basket, and among the handful of luxury sites up for tender, the one on Cape Road in Stanley would mainly involve the development of apartment blocks with only a small capacity for houses due to the development intensity of plot ratio 2. This site enjoys ample greenery and proximity to community facilities such as Stanley Plaza, which should attract market attention when being made available in the second half of the financial year of 2022-2023."