Hong Kong’s skyline in February.
Photo: Paul Yeung/Bloomberg NewsMore than 14 weeks after Hong Kong reported its first coronavirus case, the city is returning to something resembling everyday life. Though rents are falling, the city’s residential property market also seems to be getting off rather lightly.
Data released last week show that residential rents fell 5.9% in the year to March, a drop which is now worse than the 2016 slump caused by China’s economic slowdown. But given the protests which raged in the second half of last year and the pandemic, that seems like relatively good going.
Hong Kong GDP figures released Monday show the city’s economy contracted 8.9% from a year earlier in the first quarter, the largest fall on record.
Prices have been even more resilient than rents. The Hong Kong Rating and Valuation Department suggests that home prices are down by only about 1% in the past year.
That’s a sharp contrast from the global financial crisis, when the sharpest year-over-year fall recorded was around 15%, and from the Asian financial crisis in the late 1990s, when the peak-to-trough drop was more than 40%.
The simplest answer to why this time has played out differently is that the Asian financial crisis and 2008 crash saw huge disruptions to regional and global lending, and so far, the current crisis hasn’t. Loans and advances by Hong Kong banks were up by 7.2% year-over-year in March to a new record high.
Falling rents and apartment prices actually make sense given that the crucial metric for investors is the rental yield. Yields on safe assets—particularly U.S. Treasury bonds, the ultimate barometer for risk-free returns—have tumbled. It makes sense for rental yields in a relatively global property market to do the same.
Hong Kong’s property market, and others around the world, have benefited from the fact that global banks are far healthier than they were in 2008. Rapid responses from policy makers, particularly the Federal Reserve, have also helped.
Given the city’s tumbling number of active coronavirus cases, the gradual but clear recovery in China’s economy, and the lack of stress in bank lending, it would be tempting to say the worst is over already.
That would be premature. There is still relatively little known about the virus and the methods to control it. Markets have been optimistic about policy makers’ ability to address the economic shortfall and the likelihood of second waves causing further economic turmoil. With a price-to-income ratio of more than 20, the highest in the world, it’s hard to make much of a bullish case for Hong Kong property prices.
The picture for bank lending to households in Europe and the U.S. seems a little weaker than in Hong Kong, although corporate lending is booming. In both, growth in household lending for real estate is in positive territory, nothing like the retreat in credit provision that occurred in 2008.
While the upside might be thin, the downside for major property markets like Hong Kong may be more limited than the collapses in economic activity would suggest—as long as bank lending stays intact.
Write to Mike Bird at Mike.Bird@wsj.com
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