Hong Kong Property Market Crisis Deepens as Negative Equity Cases Hit 19-Year High

High interest rates and political uncertainty in Hong Kong is likely to cause prime residential prices to fall more than 10 percent this year.

Hong Kong's number of residential mortgage loans in negative equity in late 2023 has surged to 25,000, a record high in nearly 19 years. Ruth Lee/The Epoch Times

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.

On Jan. 31, the Hong Kong Monetary Authority (HKMA) released the latest survey results on residential mortgage loans in negative equity at the end of the fourth quarter of 2023. The number of residential mortgage loans in negative equity increased from 11,123 at the end of the third quarter of 2023 to 25,163 at the end of the fourth quarter of 2023, reaching a nearly 19-year high, with a quarter-on-quarter increase of 14,040 cases or 1.26 times.

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.

The amount of residential mortgage loans in negative equity rose to HK$131.3 billion ($16.8 billion) at the end of the fourth quarter, up from HK$59.3 billion ($7.58 billion) at the end of the third quarter in 2023. The unsecured portion of residential mortgage loans in negative equity increased to HK$7.3 billion ($933 million) at the end of the fourth quarter from HK$2.0 billion (US$256 million) at the end of the third quarter in 2023.

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.

“There have [also] been measures in the property market in the past few years which have enabled the public to take out mortgages at a higher loan-to-value ratio,” he told hk01.

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.

Tso Tak-ming, chief vice-president of mReferral Mortgage Brokerage Services, revealed that based on mReferral’s internal data, the proportion of buyers taking out mortgages at 80 percent of the property value or above increased significantly.

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.

According to the " Centa-City Leading Index," the overall property price decline in Hong Kong has expanded to 12.05 percent in 2022, the largest decline in 14 years since the 2008 financial tsunami. This picture shows an advertisement for a group discounted sale of private properties in the Eastern District of Hong Kong. Adrain Yu/The Epoch Times

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.

Cable cars move past residential flats at Lantau Island in Hong Kong, China on May 30, 2018. Bobby Yip/Reuters

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.

In this picture taken on May 13, 2022, a woman walks past a real estate agent in Hong Kong. Isaac Lawrence/AFP via Getty Images

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.