Chinese real estate developers are experiencing one of the most challenging periods in recent history. With a significant decline in home sales in mainland China, these developers are defaulting on billions of dollars in debt. The slowing real estate market has also had a major impact on China’s overall economic growth, with the World Bank recently lowering its growth forecast for 2024.
Plunging Home Prices and Office Space Vacancies
The precarious situation in Hong Kong’s real estate market may be even more concerning than in China. Despite massive discounts on properties compared to previous years, the number of people applying for mortgages greater than 80% has risen significantly. Property prices in the world’s least affordable housing market have experienced a 16% decline in 2022, with further drops throughout this year. Sales volumes have also fallen, reaching up to 70% lower than before.
In the commercial real estate sector, vacancy rates for office rentals have reached all-time highs of 16%, and rents have declined by 5% so far in 2023. The Midland Price Index, a volume-weighted index of average property prices compiled by Midland Realty Limited, has steadily decreased throughout the year. These concerning trends indicate that unless the economy rebounds swiftly, property prices in Hong Kong still have the potential to decline further.
Developer Woes Indicate an Impending Bubble Burst
The accumulation of debt by Hong Kong real estate purchasers has contributed to the severity of the current market situation. Analysts at Knight Frank Limited suggest that sell-offs are expected to continue due to weakening purchasing power. As a result, Hong Kong’s biggest listed real estate developers have experienced significant declines in their stock prices this year. Country Garden Holdings Limited (CTRYY) is down 67%, while China Evergrande Group (EGRNF) is 80% lower.
The negative consequences of this situation have also affected local banks. China Construction Bank Corporation (CICHY) is down 11% year-to-date, and Bank of China Limited (BACHY) is 5% weaker during the same period. However, HSBC Holdings plc (HSBC) has managed to fare better due to stock repurchases, although it still trades 6% lower than five years ago.
Risks of Market Intervention
The troubled real estate sector has triggered a sharp sell-off across all Hong Kong stocks this year. The unknown extent of defaults continues to weigh on investors’ minds, leading to a decline of over 15% in the Hang Seng Index. Speculation arises that the Chinese government may step in with a bailout for property developers, similar to the 2008 subprime crisis in the US.
The Hong Kong local government has already implemented various stimulus policies to revive the property market, including tax credits for buyers and tightening supply. However, the complexities of China’s economy and the international component of Hong Kong’s real estate scene make it challenging to resolve the situation through monetary injections alone.
Past interventions in China’s real estate market, particularly through local government financing vehicles (LGFVs), have worsened the situation by creating artificial demand and distorting land prices. Debt defaults, such as Evergrande’s missed repayments, highlight the consequences of these interventions. To complicate matters, recent auctions in Hong Kong have demonstrated the sizable discounts developers demand for new land, further exposing the weakness of the property market.
As the potential bursting of the Hong Kong real estate bubble looms, investors should closely monitor market developments and government interventions. The fragility of the market poses risks for both developers and financial institutions, making it crucial to navigate this challenging landscape with caution.