From the earliest days of British rule, Hong Kong has always been a gateway and bellwhether for the Middle Kingdom. However, as concerns mount over a slowing Chinese economy so too does the current rout in the Hong Kong property market.
Anyone that has visited Hong Kong Island can regale you with the significant demand for land and ingenious ways that Hong Kongers have invented to squeeze in extra housing. Housing has definitely never been cheap in the former colony, even for those residing within the much maligned Chungking Mansions. In decades past, real estate and property have largely been seen as a safe and prudent investment given the relative demands upon land. However, that is largely about to change as the noise of a balloon popping emanates from the market.
The determinants underpinning the market effectively shifted just prior to Christmas as sales plunged across the board. In fact, November saw a contraction in sales of 41.7% which is surprising for one of the most densely populated areas in the world. However, prices have now fallen sharply, largely following the negative trend and contracting by over 10% in January. Subsequently, speculation is mounting that the upswing cycle is now over and the market could be faced with some relatively sharp falls ahead.
In fact, analysts are now predicting that the market could fall by at least 30% by 2017 which would represent the worst property results since 1991 for the Island state. Given the relative leveraging of much of the HK property market, the risk of a large round of defaults is looming large.
Much has been made of the impact of the rout in prices but little analysis has been given to the underlying causes. As growth in China slows and the PBOC continues to attempt to stop capital flight, the clear loser is Hong Kong. The island has largely been a conduit for capital out of the ailing mainland economy and the reduction in flows is certainly hurting the real estate market.
Additionally, the fall in housing demand is also largely representative of the pain that has been suffered in mainland China from the recent collapse in the Shanghai Index. Much of the recent growth in that regard was financed by margin lending which has led to significant margin calls whilst stock prices have been in rout. Subsequently, the middle class has been heavily hit by these falls in paper wealth and there has definitely been a flow on effect into Hong Kong.
Ultimately, the economic slowdown and transition away from manufacturing in China is likely to be felt widely across the globe. The fall in Hong Kong property prices is but one symptom of a growing problem that has the potential to spill over into the larger macro economy. Most economists agree that the Chinese economy is growing at a significantly slower rate than reported and this poses a significant threat to global growth in 2016. Subsequently, keep a close watch upon Hong Kong’s property collapse for a window for what could potentially occur shortly within the Middle Kingdom.