Table of Contents
Hong Kong housing prices have been among the most expensive in the world for 10 consecutive years
Since the Asian financial crisis in the late 20th century, the Hong Kong property market has experienced ups and downs. In recent years, prices have continued to rise due to factors such as the low interest rate environment, capital inflows and land supply shortages. However, since the early 2020s, with the changes in the global economic environment, rising interest rates, the slowdown of the mainland economy and local policy adjustments, cracks have begun to appear in the market, raising concerns about whether the bubble is about to burst. As one of the cities with the most expensive housing prices in the world, Hong Kong's real estate market has long been regarded as a myth that "it can only go up and never go down." However, in recent years, the interweaving of multiple internal and external factors has caused the city's real estate market to face unprecedented pressure. From imbalanced economic structure to ineffective policy regulation, from population loss to dramatic changes in the international financial environment, the fragility of Hong Kong's property market has gradually emerged.
The world's most expensive cities in 2024:
City Ranking
1. Singapore
2 Hong Kong
3 London
4. Shanghai
5. Monaco
6. Zurich
7. New York
8. Paris
9. Sao Paulo
10. Milan
1. Historical background: the root cause of the abnormal development of the real estate market
The hidden danger of Hong Kong's property bubble stems from the continuation of the "high land price policy" after the return. The government's long-term reliance on land finance has led to a serious shortage of supply. According to data from the Rating and Valuation Department, the average annual number of private residential completions between 2003 and 2022 was only 13,000 units, far below market demand. This artificially created shortage caused housing prices to surge 5.8 times in 20 years, forming a distorted market structure where "flour is more expensive than bread."
The phenomenon of developers hoarding land exacerbates the imbalance between supply and demand. The four major developers hold 100 million square feet of farmland, but have yet to develop it. This strategic hoarding has caused the market to be in a state of "false shortage" for a long time, pushing up housing prices while also accumulating huge bubble risks.
2. Economic fundamentals deteriorate: Support collapses
1. There is a serious disconnect between purchasing power and housing prices
Data from the second quarter of 2023 showed that the median household income in Hong Kong was HK$30,200, while the average house price was HK$14.3 million, with a house price to income ratio of 47.3 times, ranking first in the world. Even if you buy a 300 square foot nano unit, you will need to go without food or water for 23.6 years, which is 5 times the international warning line.
2. Rental yields hit historic lows
The vacancy rate of Grade A office buildings in the core business district climbed to 15.7%, and retail shop rents fell by 45% compared to before the epidemic. The residential rental return rate has fallen below 2%, far below the mortgage rate, forming a "negative cash flow" investment model that relies entirely on capital appreciation expectations.
3. Household debt is approaching the dangerous edge
Data from the Monetary Authority of Singapore showed that household debt accounted for 92% of GDP, of which 78% was mortgage loans. When the interest rate rises by 1%, the monthly payment burden will increase by 12%, and more than 100,000 households will face the risk of negative assets.
4. Mainland economic slowdown and weakening demand
The Hong Kong property market is closely linked to the mainland economy, and mainland buyers have always been an important pillar of the luxury housing market. However, the slowdown in mainland economic growth in recent years, the debt crisis of real estate companies (such as Evergrande, Country Garden, etc.) and strict capital controls have weakened the ability of mainland funds to flow into Hong Kong. Since 2023, the transaction volume of luxury homes in Hong Kong has dropped significantly, and the prices of some high-end properties have fallen by 20%-30%. If the mainland economy fails to recover quickly, external demand for the Hong Kong property market will shrink further, accelerating the bursting of the bubble.
5. Weak local economy and negative equity risk
The post-epidemic recovery was slow, the tourism industry was sluggish, and retail consumption declined. Although the unemployment rate has fallen, overall income growth has stagnated and citizens' purchasing power has declined. At the same time, high property prices have led to a surge in negative equity cases. According to data from the Hong Kong Monetary Authority, the number of negative-equity mortgage loans has increased significantly at the beginning of 2024, reflecting that some owners have fallen into insolvency due to falling property prices. If housing prices continue to fall, banks may tighten credit, further exacerbating market panic.
3. The double-edged sword effect of policy regulation
1. Countercyclical measures fail
The government’s “tough measures” such as the additional stamp duty (SSD) and buyer’s stamp duty (BSD) have pushed up transaction costs during the market upturn, which in turn has intensified the “reluctant to sell” mentality. The number of residential transactions in the first quarter of 2023 fell to 8,632, the lowest since 1996, and the depletion of market liquidity has increased the risk of price volatility.
2. The fatal shock of interest rate normalization
Under the linked exchange rate system, Hong Kong is forced to follow the United States in raising interest rates. The prime rate (P) in August 2023 rose to 5.875%, and the H-rate exceeded 4%. Based on a loan of HK$6 million, the monthly payment will increase by HK$9,200 compared to 2020, directly destroying the middle class's ability to buy houses.
3. Land supply reform encounters obstacles
The "Lantau Tomorrow" reclamation project has been delayed, the northern metropolitan area has developed slowly, and the continuity of policies after the change of government is in doubt. The public housing gap will reach 28,000 units in the next five years, and the supply of private housing has been below the target value of 15% for three consecutive years, leaving no solution to the contradiction between supply and demand.
4. Drastic changes in social structure: shaking demand foundation
1. The double blow of population loss and aging
The net outflow of population in 2022 will reach 113,000, and the main home-buying group aged 25-44 will decrease by 8.4%. At the same time, the proportion of the population over 65 years old rose to 20.7%, forming an inverted pyramid structure of "many elderly people with houses and few young people without houses", and rigid demand continued to shrink.
2. Industrial hollowing out weakens payment capacity
Financial real estate accounts for 32% of GDP, but the number of people employed in the industry only accounts for 18% of the labor force. The development of the technology industry has lagged behind, the growth of middle-income jobs has stagnated, and the real wages of the younger generation have remained flat for a decade, making it difficult to support high housing prices.
3. Revolutionary changes in living patterns
The integration of the Greater Bay Area is accelerating and cross-border life is becoming normalized. 150,000 Hong Kong people live in Shenzhen, and Zhuhai's "Hong Kong New Town" project absorbs 32,000 families. Alternative housing options divert local demand and shake the foundations of the property market.
5. Drastic changes in the international environment: the crisis of capital pool depletion
1. Restructuring of the US dollar hegemony structure
Under the trend of de-dollarization of the SWIFT system, Hong Kong's offshore RMB deposits have decreased by 23% in two years. The proportion of Hong Kong properties held by foreign capital has dropped from 13.7% in 2018 to 6.2% in 2023, and the risk aversion of international capital has accelerated.
2. Geopolitical risk premium surges
The revision of the US Hong Kong Policy Act triggered a wave of capital withdrawal by multinational companies, and the demand for office space by multinational institutions plummeted by 42%. The residential rental budget of foreign executives has been reduced by 35%, and the high-end market has fallen into a cold winter.
3. Diversion effect of alternative markets
The price of private homes in Singapore has increased by 68% in five years, Dubai has launched a "golden visa", and the yield on housing prices in Tokyo has reached 4.2%. As investment alternatives in the Asia-Pacific region increase, Hong Kong's competitive advantage has significantly weakened.
6. Potential Black Swan Triggering a Crash
1. RMB depreciation triggers asset revaluation
If the RMB breaks 7.5 against the US dollar, the linked exchange rate system will be under unprecedented pressure. Capital flight may trigger a wave of real estate selling, repeating the 1997 Asian financial crisis.
2. Chain reaction of commercial real estate debt defaults
Office building valuations have fallen by 35% from their peak, and many real estate investment trusts are facing liquidation. If giants such as Henderson Land Development face a liquidity crisis, it may trigger financial systemic risks.
3. The vicious cycle of deteriorating public finances
The proportion of land price income to government revenue plummeted from 23% in 2019 to 6% in 2023. The continued expansion of the fiscal deficit may force the government to sell land at a low price, forming a death spiral of "the more it sells, the lower the price."
4. Financial market turmoil and Hong Kong dollar stability
Hong Kong's linked exchange rate system pegs the Hong Kong dollar to the U.S. dollar, but the Hong Kong dollar may come under pressure if global financial markets are turbulent, such as a sharp appreciation of the U.S. dollar or a U.S. recession. Some analysts believe that if capital outflows continue, the Hong Kong Monetary Authority may need to use foreign exchange reserves to defend exchange rate stability, which may undermine market confidence in the property market. Once the stability of the Hong Kong dollar is questioned, the lessons of the property market in the 1950s show that financial crises are often the trigger for a property market crash.
5. Financial crisis of large developers
The Hong Kong property market is highly concentrated in a few large developers, such as Cheung Kong Group and New World Development. In recent years, these companies have faced increasing financial pressure due to sluggish market and high leverage operations. For example, the rent of Cheung Kong Center, owned by Cheung Kong Holdings, has fallen by more than 33% since 2019, indicating that the commercial real estate market has been under pressure first. If a large developer goes bankrupt due to a broken capital chain, it may trigger a chain reaction and drag down the entire market.
This time is different from 1997
The Hong Kong property market is at a historical turning point, and the risk of a bubble bursting has materialized. Unlike the cyclical adjustment in 1997, this crisis involves fundamental changes in economic structure, demographic trends, and international status. To avoid a catastrophic collapse, we need to break through the existing thinking framework: in the short term, we need to establish a mechanism to slow the decline of housing prices; in the medium term, we must get rid of dependence on land finance; and in the long term, we must reshape industrial competitiveness. Only by learning from the painful experience and promoting deep reforms can the government take decisive actions in increasing supply, regulating policies and diversifying the economy to ease the pressure of the crisis. Only in this way can the Hong Kong property market break out of the historical cycle of "surge and plunge" and achieve sustainable development. Otherwise, the bursting of the property bubble could become a turning point for Hong Kong's economy, with far-reaching consequences.
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