_How to make a good prediction of Hong Kong's housing prices?

In Hong Kong, housing price is a constant topic in the media, on the social network and amongst professional pundits. Yet, when it comes to predict its future movement, no one seems to be sure who to believe. By August 2018, it had been on rising streak for 28 months. Then there were signs of a correction beginning to emerge. By November, it has dropped 3.6% month-on-month. But prices still rose 3.9% over the whole 11-month period last year.

One would be forgiven for not knowing what to expect in the next 12 months. Opinions are split even amongst many professionals.

People often seek answers from interest rates, supply pipeline, new government taxes, the movement of hot money, or various combinations of these.

But we think given the relative simplicity of our economic system, there has to be a more straightforward indicator to forecast price trends. In this sense, we have conducted a series of simple correlation analysis to see which amongst a host of popular factors impacts our housing prices the most.

We started with government policies. In Hong Kong it is widely believed that the cooling measures in recent years, from double stamp duty to tightening of mortgage requirements, have virtually no impact on house prices. Our study further reveals that even over the long period of 10 to 20 years, policies have hardly made a dent on the long term price uptrend. Empirical evidence seems to suggest that we can discount policy altogether.

Then we conducted a similar series of tests on the historical movement of interest rates, money flow in the system, inflation, even the housing supply pipeline, to see if they have any bearing on housing price trends. Again, we found there is little or no correlations between their fluctuations and the housing price trend!

So what is going on? Remember, our aim here is to find a simple indicator of price movements for everybody instead of engaging in philosophical debate. Nevertheless, it may show that people in this city believe in one thing and one thing only, that is there is always demand for housing in Hong Kong.

That belief alone is enough to counter the influences of mortgage rate hikes, the threat of hot money and the prospect of more future supply. Again, with these variables out of the equation, we left with no clear-cut tools to forecast the price trends.

We often hear people fret over the economy as their make a move on the housing market.  In fact, our study shows that historically GDP and housing prices moved almost hand in hand. Therefore, it fits our requirement of a good pointer for house price movements.

Nevertheless, the interaction of variables that contribute to GDP may not be easily understood by ordinary people. Luckily, our study also shows that the benchmark stock market index, the Hang Seng Index (HSI), is also closely linked with the GDP and therefore closely linked with Hong Kong’s house price trends.

Given our relatively simple economic structure led by financial and service industries, we are in a unique market where the fluctuation of the stock market synchs with the real economy. Furthermore, our study also shows that when the HSI moves, there is a typical lag of around three to six months before the house price indices move in the similar fashion. Now, this is some index that ordinary people are familiar with and it can serve as a good indicator for housing price forecast.

The local housing market has started to show signs of weakness since August 2018. If our hypothesis of time lag is indicative, given the stock market decline in second half of 2018 due to concerns like a slowdown in China’s economy, we can now predict that Hong Kong’s housing price will see some significant correction in the course of 2019.  

Of course, this is just an educated guess which cannot replace actual professional forecasting work. At best our simple correlation only points to a general direction of the market and rough scale.

By no means this is a guide for actual investment. Nevertheless, we at least proved that Hong Kong’s property prices are closely linked with the HSI. So even the most casual observer can now predict the general movement of Hong Kong’s housing market.

Read more in our new report on “Forecasting Hong Kong Housing Prices – What Really Matters?”

For more information contact: david.ji@hk.knightfrank.com