We published three papers in 2019 and 2020 to assess how Hong Kong housing prices had changed according to different factors. Previously, we highlighted that the Hang Seng Index (HSI) leads Hong Kong housing prices by one to two quarters over the long term, and that the high correlation between unemployment and housing prices could lead to a structural break in the correlation between the HSI and housing prices in the near term, especially if there is rapid growth in unemployment.

In recent months, we have seen the unemployment rate in Hong Kong continue to decline and gradually return to the long-term average level, and housing price growth is back in positive territory. The correlation between housing prices and the HSI has been weaker since the beginning of 2020. These two findings confirm our previous observations.

With the economy now rebounding from the trough and real GDP having grown to 7.8% in the first half of 2021, it is interesting to see how economic growth has driven housing prices. Rather than simply looking at the overall correlation coefficient between these two variables, we developed a model known as the “property-economy-cycle” to provide a deeper analysis.          

PROPERTY-ECONOMY CYCLE

The property-economy cycle model was constructed to analyse the fundamental relationship between the property market and the overall Hong Kong economy. Between 1997 and Q2 2021, average annual housing price growth was 6.4%, while average real GDP growth was 2.9% per annum. In the model, these average points are used to determine the border of the property-economy cycle quadrants.

FOUR-QUADRANT ANALYSIS

Examining the four-quadrant analysis of the property-economy cycle model, we can see three significant findings:

1.     Regular cycle

Over the past 25 years, the property-economy cycle in Hong Kong has mostly followed the “expansion”, “over-expansion”, “recession”, “recovery” order. We have seen only a few counter-cycle moments, in which the cycle did not progress to the next stage and moved back to the previous stage, including the SARS outbreak in Q1 2003 and after the global financial crisis in late 2009 to early 2010.  

2.     Shorter cycle

The analysis also shows that the duration of the property-economy cycle tends to become shorter over the years. It took almost seven years between Q3 1997 and Q1 2004 to complete a cycle. The most recent completed cycle lasted for less than two years between Q2 2015 and Q1 2017. The underlying reason was higher intervention from the government to facilitate the cycle.

3.     Current cycle distorted

Because of two unprecedented incidents, social unrest and the COVID-19 pandemic, the current property-economy cycle has been distorted and is longer-than-expected. It started in Q2 2018 in the “expansion” stage, and has lasted for almost three years, with the latest “recovery” stage starting in Q2 2021. The “recession” stage of the cycle lasted for nine quarters, from Q4 2018 to Q4 2020 before it turned into “recovery” in 2021, making it the longest “recession” cycle since 1997.

Forecast

With stable economic growth, the property-economy cycle is not likely to fall back to the “recession” stage. Instead, since housing prices have already gone up by 4.3% on a year-to-date basis as at end-July, another increase of about 2% by the end of the year will move the cycle from the “recession” to the “expansion” stage.

Martin Wong, Director and Head of Research & Consultancy, Greater China at Knight Frank said, the low interest rate environment will continue to be the key driver to encourage prospective buyers to climb the property ladder or investors to acquire assets and look for capital appreciation for the next 18 months or so. Under current market conditions, Hong Kong housing prices are expected to reach new heights before Q3 2021 ends. With the vaccination rate continuing to increase in both the Chinese mainland and Hong Kong, the potential border opening will lead to an influx of purchasing power from the mainland. We forecast that housing prices will increase up to 8% over the whole year, moving into the “expansion” stage of this property-economy cycle.