What could break the Hong Kong real estate market?
PMORE WAYS land at Kai Tak, Hong Kong’s former airport. But the nostalgic can stroll along the new “sky garden”, a raised walkway lined with frangipani, myrtle and acacia trees, which passes over the old track. By scanning a QR code along the route, visitors can “heighten reality” by overlaying the image of a landing plane on their selfies. The park is part of a redevelopment plan that will eventually produce a hospital, a tax office and new homes for tens of thousands of people. On either side of the walkway, cranes, excavators and welders are actively working to increase the reality of Hong Kong’s cramped and expensive housing.
They have their work cut out for them. Real estate in Hong Kong remains horribly expensive, despite two years of protests and a pandemic. House prices in April were only 1.5% lower than their 2019 high. In a tower under construction in Kai Tak, an 889 square foot apartment sold last month for more than $ 30 million. Hong Kong dollars ($ 3.9 million).
The real estate market has withstood the pandemic better than it has SARS outbreak of 2003, when prices fell almost 8%. Indeed, the market remained tight this time in part because of the decisions taken at the time. When SARS hit, house prices had already fallen by more than 60% since 1997. To reduce supply, the government decided to “withdraw from its role of real estate developer”, pledged not to “sell land at a ridiculous price ”, and noted with satisfaction that the supply of new apartments was decreasing. Hong Kong built nine new cities (now home to nearly half of its 7.5 million population) between the 1970s and early 2000s. It has not been done since.
Instead, the government confined housing construction to smaller, fragmented sites, often located in and around existing developments. He is too embarrassed to call them “new cities,” said a speaker at a recent conference hosted by Hong Kong University Business School. Rather, he calls them “new development zones”.
With the help of such sites, the government hopes Hong Kong will add 430,000 apartments over the next ten years. This, he believes, would meet the growing demand. But these targets tend to be overly optimistic: since 2007, home construction has exceeded them by around 18% in an average year. If the trend continues, Hong Kong will only add around 350,000 homes over the next decade.
In this “baseline” scenario, housing is expected to strengthen further, according to Morgan Stanley. So what would it take to bring down property prices? The bank has also implemented what it calls a “bearish” scenario where prices fall by a fifth or more. For that to happen, Hong Kong would need to add around 730,000 homes over the next ten years, the bank calculates, increasing existing stock by nearly 30% (see chart).
It would require encroaching on the fields, the sea and the sky. Hong Kong is expected to build taller, with more floor space at each site. The conversion of agricultural land should be accelerated, which can take 15 years or more. And 235,000 homes would have to be added on reclaimed land. That would include the government’s controversial plan to add land east of Lantau, Hong Kong’s largest island, which is home to 172,000 people as well as white-bellied eagles, Bogadek’s burrowing lizards and wingless porpoises, which conservationists say could be threatened by the initiative.
While it takes years for these efforts to bear fruit, a credible plan could change sentiment – and prices – immediately, points out Morgan Stanley’s Praveen Choudhary. In the bearish scenario, house prices fall 20% by the end of 2022. In other words, the downward reversal would look like one of the hard landings in Kai Tak that made the arrival in Hong Kong so exciting. ■
This article appeared in the Finance & economics section of the print edition under the title “Failure to land”