Downward pattern in the home cycle deepened in Q1 2016 amid growing economic worries. With negative real interest rates persisting and the pace of interest rate increases likely to be slow, the Hong Kong residential market should stabilise in the near term. However, given severely stretched affordability, slowing demand and rising supply, we expect home prices to slide 10% in 2016, with luxury residential prices falling 15%. While we do not expect a sudden collapse, we think local home could fall by 30% or more over the next three years.

Global economic outlook uncertain despite quantitative easing

Economic prospects clearly weakened over Q1 2016 in Asia and indeed in most countries outside the US, where the picture was mixed. European central banks have been pushing interest rates into the negative territory for some time in an effort to boost growth, while the Bank of Japan followed suit in late January.

Deterioration in the global economic picture was most evident in emerging markets. Chinese GDP growth fell to a 25-year low of 6.9% in 2015 and is almost certain to be weaker this year. While growth in China remains solid, among other key emerging markets, South Africa is teetering on the brink of negative growth, and Russia and Brazil are in outright recession.

Among the so-called BRICS countries, only India is performing well. For these reasons, the US Federal Reserve reassessed the pace of its planned interest rate hikes in March and scaled back its original estimate of four one-quarter percentage point increases this year to two.

Residential sales dropped to lowest since 1991

As undercurrents of economic uncertainties and falling prices deterred buyers, Hong Kong transaction volumes decreased 24.0% quarter-on-quarter (QOQ) in the three-month period ending February 2016, and residential transaction value dropped 25.3% QOQ to HKD57.4 billion (USD7.4bn), according to Land Registry statistics. But in the month of February itself, the number of residential sales transaction fell to just 1,807, the lowest monthly figure recorded by the government since 1991 and a stark contrast with the long-run monthly average of around 8,000.

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