With Hong Kong’s property prices falling faster than expected in 2023, the issue of negative equity has drawn renewed attention. The number of residential mortgage loans in negative equity in late 2023 has surged to 25,000, a record high in nearly 19 years.
According to the HKMA, these cases mainly involved residential mortgage loans to bank staff or loans under the mortgage insurance program, which generally have higher loan-to-value ratios.
Property Prices Falling Faster Than Expected
Negative equity refers to the current market value of a property falling below the outstanding balance of the mortgage.According to Leo Cheung Sing Din, a visiting associate professor at the University of Hong Kong, Faculty of Architecture, if a member of the public takes out a mortgage loan at 85 percent of the value of his/her flat, the flat will become a negative equity asset when the property price drops by 15 percent.
Prof. Cheung believes that the sharp increase in the number of negative equity cases is mainly due to the faster-than-expected decline in property prices in Hong Kong.
The increase in the number of negative equity cases will continue, as there are no special policies or favorable factors that will lead to a rebound in property prices, he added.
With property prices falling by over 20 percent from their peak, those homeowners who enter the market with high property prices and adopt high-percentage mortgages between 2019 and 2022 will have a greater chance of becoming negative equity.
In 2023, Hong Kong’s post-quarantine economy was still waiting for recovery. However, high mortgage interest rates and geopolitical instability have affected the performance of the property market, with both transaction volume and property prices falling at the same time, of which the number of residential registrations during the year recorded 43,000, a year-on-year decline of about 4.5 percent, hitting a new record low. Property prices rebounded by about 6 percent in the first half of the year but fell by nearly 5 percent in the whole year.
According to the data of the Rating and Valuation Department, the price index of private residential property in the fourth quarter of 2023 was 317.1 points, down for eight consecutive months, dropping by over 20 percent compared with the record high of 397.9 points in the third quarter of 2021.
Prediction: Property Prices to Fall by 10 Percent
The authorities’ policy relaxation did not help the property market in any way, and the stock market’s poor performance had a lagging effect on the property market, Joseph Tsang Hon Ping, Managing Director of JLL Hong Kong, said in December 2023.Mr. Tsang predicted that property prices would continue to fall, small and medium-sized residential property prices would decline by about 10 percent in 2024, returning to the 2016 level, and the number of negative equity properties was expected to reach a level of about 30,000 cases.
Chau Kwong Wing, Chair Professor of Real Estate and Construction at the University of Hong Kong, estimated that property prices will continue to fall in 2024, with the possibility of a further drop of about 10 percent. He believes that even if professionals from the mainland come to purchase properties in Hong Kong, it may not be of much practical help.
Negative Equity Situation ‘Just Begun’
More than half of the 30 major global cities monitored by Savills plc will see a slowdown in annual residential capital value growth in 2024, according to a report seen by Bloomberg.Savills plc expects that, overall, growth in high-end residential prices will slow to 0.6 percent in 2024 from 2.2 percent in 2023, the lowest rate of increase since 2019.
Hong Kong is set to be the softest market tracked by Savills plc.
“High interest rates and political uncertainty in Hong Kong is stoking sales while deterring buyers, and the combination is likely to cause prime residential prices to fall more than 10 percent this year,” reads the article.
Shi Shan, a senior editor for the Chinese edition of The Epoch Times, said that from a macro perspective, with high interest rates and economic downturn, property prices in all major cities globally are likely to fall, with Hong Kong being the first to bear the brunt, with the situation of negative equity assets worsening.
“As of now, this negative equity situation has just begun,” he said.
Mr. Shi argued that Hong Kong is already an economically “isolated island.”
“That is to say, Hong Kong used to be able to step on many boats, but now it is left with only one boat under its feet, which is mainland China, and it rises and falls based on the economic situation in China, with no room for maneuver,” he said.
During the period between the financial turmoil in 1997 and the outbreak of the SARS pandemic in 2003, property prices in Hong Kong plummeted by about 70 percent. During the period, more than 100,000 negative equity cases were created, accounting for about 22 percent of the total number of mortgages.
The pain caused by such financial turmoil remains fresh in the minds of Hongkongers in their 40s and 50s. At that time, many people had worked hard to make mortgage repayments. However, the plummeting of property prices made these people’s dreams come to naught.
Not only have their years of savings been lost, but many, including the middle class, have also been reduced to the negative-equity group and gone bankrupt.
