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Hong Kong's short-lived property price decline is just about over, analysts say

Key Points
  • Residential property prices in crowded Hong Kong are poised to rise again after a short correction, analysts say.
  • Swiss Bank UBS last year listed Hong Kong as the city with the most overvalued prices in the world.
  • But after declines of 10 percent, analysts say demand is increasing, while external factors such as fewer expected interest rate increases by the Federal Reserve make Hong Kong property more attractive.
Hong Kong.
Jerome Favre | Bloomberg | Getty Images

The recent slide in Hong Kong's residential property prices may soon be ending.

Just four months after the city topped Swiss Bank UBS' chart of the world's most overvalued housing prices, analysts are calling a bottom after a short correction.

Property is a key driver of the economy in land-scarce Hong Kong, where some 7.4 million people are packed onto small islands and a jagged, mountainous peninsula that borders mainland China.

Analysts last year predicted residential property prices in the city would decline between 15 percent and 20 percent, pressured by declines in the Hong Kong and mainland stock markets, a weakening Chinese yuan and rising local borrowing costs.

Prices have already come down 10 percent since their peak in August last year, CLSA property analyst Nicole Wong wrote in a report last Wednesday

But now, she said, property could gain from a stabilization for Hong Kong's stock market and the Chinese yuan. On top of that, Wong added, the U.S. Federal Reserve's "tame rate guidance" may push investors in Hong Kong to seek returns in higher yielding investments such as property.

Hong Kong's currency is linked to moves in the U.S. dollar and rising U.S. interest rates mean that Hong Kong rates will follow suit — the city's monetary authorities move in lock step with their counterparts at the Fed.

But sharp declines in stateside stock markets in the fourth quarter of last year and worries about the outlook for U.S. and global economic growth have resulted in expectations for a slowdown in the American central bank's pace of rate increases.

"Market dynamics have shifted," Wong wrote, predicting that prices will bottom out over the next couple of months before rising by as much as 15 percent.

'Improving buyer sentiment'

Ken Yeung, who covers the property sector at Citi, said in a note Monday that a recent weekly increase in local price indices and recent signs of strong demand back up the U.S. bank's view that the correction is near an end. Recent robust weekend sales have "reaffirmed the improving buyer sentiment on the back of accumulated pent-up demand," Yeung wrote.

Citi has said it expects home prices should increase 10 percent from April to December this year.

CLSA also expects a surge in demand from mainland Chinese buyers who moved to Hong Kong on work visas in 2012. Those who have stayed and can claim permanent residency will be eligible to purchase property without paying a 30 percent tax.

Real estate and investment management company JLL, which last year said that Hong Kong housing prices could decline as much as 25 percent if the U.S-China trade war worsened, is still cautious.

It said in its residential Sales Market Monitor for January on its website that the market outlook "remains heavily dependent on how the U.S.-China trade war plays out, the outcome of which will dictate market sentiment."