Hong Kong Property Market Defies Financial Gravity

‘Blanket of immobility across the economy’

The Hong Kong property market shows every sign of being artificially propped up to save embarrassment for its major banks. As a result, there is a failure to bite the bullet and force deflating borrowers to sell assets or admit bankruptcy and thereby share the pain with the bankers who believed the nonsense that Hong Kong property prices always went up and that companies such as New World Development were backed by an inexhaustible supply of private wealth.

The result is a lack of dramatic headlines of failures and crashes, just a blanket of immobility across the economy. What a contrast to the period 1983-86, which saw a fall of 50 percent in the housing price index and the failure of various banks such as Wing On, Ka Wah and Overseas Trust Bank and various deposit taking companies and the failure of speculative, and downright dishonest, companies such as the Carrian Group which had successfully bribed some prominent bankers.

The result, however, was not the decade and half of zero growth experienced by Japan after its 1990 asset price fever but a strong rebound which saw residential prices rise tenfold to a new peak at the time of the July 1997 handover to the PRC. And, despite a slump in the early 2000s that was exacerbated by the arrival of the SARS virus, the market had more than doubled to a new peak in early 2019. Since that time, prices have fallen by about 20 percent. But unlike the early 1980s, the crisis this time is less in the residential sector than in office and commercial property, which suffer from various ailments including new supply which began in the pre-Covid period, slow growth of the economy in general, and increased working from home.

The retail sector, meanwhile, suffers from loss of business to Shenzhen across the border, and a generally weak tourist arrival and local consumption business. Retail sales are still experiencing a downturn in certain categories, with a 14th consecutive month of decline in April.

There is little prospect for immediate improvement in either. Some 325,150 sq. m. of new office supply is expected to come online this year in a market whose availability rate for office space stands at 19.1 percent (c. 1.25 million sq. m net), according to the global commercial real estate services firm Cushman & Wakefield. Additional supply, the firm forecasts, “is anticipated to exert further downward pressure on rents which are forecast to decline by -7 percent to -9 percent over the course of the year, with the overall availability rate projected to reach 22 percent by the end of the year. Availability and new supply outweigh demand “and this will continue for the foreseeable future.”

But a substantial part of this problem is inadequate price adjustments. Rents remain such a high proportion of business costs, particularly for small retailers and restaurants. Some landlords are rich enough that they would rather leave shops vacant than accept necessary cuts and meanwhile bank indulgence of borrowers is limiting the asset sales which would bring prices down to clearing levels. That many developers are also over-committed to mainland investments, simply makes a market solution even more difficult.

New World was eventually able to renegotiate HK$88 billion (US$11.2 billion) in loans but only after smaller lenders were heavily leaned on by big banks unwilling to take losses on the chin. Now, lesser developers are reported to be lining up for similar loan refinancings. Local media have reported several mid-size developers as being in difficulties, including Emperor Group and Far East Consortium. There are doubtless more. But the assumption of bankers, and the media, is that calling loans is a bad thing from which banks and developers lose. But for the economy as a whole, the sharper the pain, the quicker the healing as new money comes to buy now-cheap assets and new commerce is attracted to Hong Kong by lower costs. Nor should it be a major concern for the government whose land sale revenues have already collapsed and which knows new revenue sources are needed.