We expect home prices to slide 10-15% and would achieve a soft landing in 2016. However, given the severely stretched affordability, home price could fall by 30% or more over the next three years if China’s economy continues to decelerate. In the leasing perspective, increasing global risks will weigh on the luxury residential sector. We predict luxuy residential rents to fall 5% in 2016. 

Residential sales increased 45% QOQ in Q2 2016:
Despite the fact that sales of homes increased 45% quarter-on-quarter (QOQ) to 11,449 in the three-month period ending May 2016, transactions decreased 18% from a year ago over the same period and present a stark contrast to the long-run quarterly average of 22,969 transactions. The persistence of negative real interest rates (currently about -2% in Hong Kong) had helped the market to stablise during Q2 2016: home prices rebounded for the second consecutive month in May, up 0.7% month-on-month (MOM) after a 0.9% growth in April, according to government figures. However, home prices are still 10% lower from their peak in September 2015.

The fact of Brexit and attendant concern about increased global economic risk may delay increases in US interest rates, even if they seem certain to rise gradually over the next few years. Interest rates in the US will clearly not rise as far or as fast in 2016 as originally expected. This means that negative real interest rates (currently about -2% in Hong Kong) will persist in Hong Kong for some time. This factor should cause the residential market to stabilize.

However, buying confidence is overshadowed by a weak global market, the slowing Chinese economy and a volatile stock market. More fundamentally, homes are still essentially unaffordable: Hong Kong’s price/household income ratio stands at 19 times, the highest level in the world. We expect residential prices to deflate over the next three years as interest rates normalise and as supply increases to around 23,000 units per annum. A reversion in affordability to the historic average would imply a decline in prices of perhaps 30% over the next three years or so. This negative scenario cannot yet be ruled out. 

Forecast at a glance:

• Demand - The primary market will dominate property sales as developers continue to offer greater incentives and launch new flats at attractive pricing 
• Supply - Housing supply increases to around 23,000 units per annum over the next 3 to 4 years 
• Rent - Luxury residential rents should slide 5% in 2016 in the wake of the increasing global economic risks and uninspiring business conditions. This followed a 9.8% growth in 2015 
• Price - Given the severely stretched affordability, slowing demand and rising supply, Hong Kong residential market should experience a soft landing. We predict home prices to fall by 10% to 15% in 2016 

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