Despite having the most expensive property prices in the world, Hong Kong real estate prices are expected to drop in 2016. This is according to experts and analysts in the city’s residential property sector.

With an average price at $22,814 per square meter, property values in Hong Kong have long been ranked third in the world and have been considered to be extremely pricey. One of the main leading reasons for the high prices and the constant increase in value was the limited space in the financial hub of Asia.

Home values have been on a constant rise as proven by the 340% increase since 2003. The relentless rise in real estate prices has, in fact, renewed concerns the government may impose more property tightening measures. Example of such a measure would be stricter mortgage restrictions or higher taxes on foreign purchases.

However, this trend seems to be changing. Both JPMorgan Chase and UBS disclosed that home prices in Hong Kong could fall until the end of 2017. This will be caused by an economic slowdown in China, rising unemployment rates, and a lower inflation rate.

 

The Future of Hong Kong Real Estate Prices?

According to Cusson Leung, head of Hong Kong property for JPMorgan, there is a high chance residential prices could falling by 5% to 10% per year starting in 2016.

Despite the expected fall in residential housing prices next year, prices are expected to rise for the rest of 2015. With new homes and existing housing expected to rise 5% and 10% respectively, property values this year will still be expensive.

Eva Lee, executive director and head of Hong Kong/China Property Research at UBS, was of the same opinion. She mentioned the upcoming cycle leading to the fall of Hong Kong property values will be different than previous ones. This is because it will not be triggered by global economic shocks. Instead, a deteriorating local economy will be the catalyst.

Cusson Leung said Hong Kong;s shrinking retail market, mainly driven by the closure of luxury brand stores, is driving down property sales. Other factors were rising unemployment and a planned interest rate hike in the United States.

According to Leung, “Pressure on the economy is the biggest concern here instead of an interest rate hike.”

 

Hong Kong Property Stocks Doing Badly

Alfred Lau, a property analyst from Bocom International, predicts a fall. She does this by looking at real estate prices relative to property stocks. Lau said that Hong Kong home prices are now the highest compared to property developer stocks in almost two decades. “It’s a sign the property market will drop as much as 20% in the last quarter this year,” he said.

There were other signs telling the same story. Hong Kong’s private-sector economy saw its sharpest contraction ever since 2009 in August. This is a distress signal for the economic health of Asia’s financial capital.

Hong Kong’s weakest home sales in 17 months were also reported after a month-long stock rout in China. Sales are down by a third compared to 2014.

In regards to the shrinking retail market, it was found that 42% of the sales came from tourists. This is the highest proportion in the world. Hong Kong real estate values will suffer even more once tourist arrivals fall.

Looking to buy property in Hong Kong regardless? You might want to look at our guide to investing in Hong Kong.

About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's experienced with trading stocks and buying property in Thailand, Cambodia, and elsewhere. He's been featured in publications such as Forbes, Nomad Capitalist, Property Report, and Seeking Alpha. Download his free investment guide by clicking here.

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