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China's 'pent up demand' may prop up Hong Kong's property market in 2019

Key Points
  • Traditionally volatile Hong Kong property prices are in correction mode but there is no danger of an all-out crash, experts say.
  • Hong Kong's "pretty good" economic fundamentals and the lack of major new land supply will prevent the bottom from falling out, says Peter Churchouse, founder of Hong Kong-based real estate investment firm Portwood Capital.
  • Buyers from mainland China obtaining permanent residency status in Hong Kong next year will also support the market and drive up prices, says CLSA's Nicole Wong.

Hong Kong property prices have fallen sharply and look set to continue their downward trend until the end of 2019— but there's no danger of an all-out crash, experts said Monday.

That's because resilient local economic fundamentals and pent-up demand from mainland Chinese who have moved to Hong Kong will likely stem the decline next year, they told CNBC.

"If you look at the basic fundamentals, unless we get a financial crisis in China or something like that, I think we're looking at a correction — not a crisis in the Hong Kong property market, " said Peter Churchouse, founder of Hong Kong-based real estate investment firm Portwood Capital.

Housing is a key economic component in crowded and land-scarce Hong Kong, where about 7.4 million people inhabit small, mountainous islands and a craggy peninsula bordering the southern end of mainland China.

The basic fundamentals are pretty good in Hong Kong.
Peter Churchouse

Hong Kong was a British colony for about 150 years until 1997, when the territory became a semi-autonomous region of China. Prices have more than doubled in the last decade, in part due to low interest rates, scarce housing supply and large inflows of capital from mainland Chinese.

It is one of the most expensive housing markets in the world, but prices periodically go through adjustments such as the current correction cycle where prices fell in the second half of this year as the market began to calibrate asset valuations.

Asian markets can be prone to sharp price swings, Churchouse told CNBC's "Squawk Box" on Monday.

"Hong Kong, in particular, is the most volatile property market in the world," he said. He predicted that the current downturn could see average residential prices decline as much as 20 percent through the end of next year, though a drop far beyond that level is out of the question, he said.

"The basic fundamentals are pretty good in Hong Kong," Churchouse said, adding there is no large increase in land supply on the horizon.

Apartments in Hong Kong
Getty Images

A slew of forecasts have emerged over the past few months, with predictions of about a 10-20 percent decline in residential prices expected by the end of 2019, with rising local interest rates cited as a key factor.

Investment management company JLL warned last month that prices could decline as much as 25 percent, if the trade war between the United States and China worsens.

"Affordability's not good and interest rates are going up, that's for sure. But still, in nominal terms, interest rates are at the very low end of long term averages (and) unemployment is very low," Churchouse said.

Nicole Wong, regional head of property research at CLSA in Hong Kong, forecast in August that prices would decline 15 percent over the following 12 months.

Speaking on CNBC's "Street Signs" on Monday, Wong said prices declined six percent in the past 3-4 months, adding they have "corrected very quickly."

However, purchases from a select cohort of mainland Chinese buyers will likely to prop up prices next year, she said.

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Hong Kong property market correction fears are likely overblown, says CLSA

The government in 2012 imposed a duty that increased the amount of taxes to as much as 30 percent of the purchase cost for non-residents in a bid to curb prices.

It takes seven years to obtain permanent residency in Hong Kong, Wong said, and these buyers will be poised to purchase properties in 2019.

"It's the year when most of the pent- up demand from the mainlanders (is) going to actually come of age," she said.

And with prices potentially falling 15 percent that amounts to a big windfall for many of them.

"Home prices are 45 percent cheaper for them," Wong said.