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News & opinion

22 MAY 2018

How much more support will Hong Kong's economy provide to home prices?

The April RICS Hong Kong Residential Market Survey shows that home prices and rents have maintained the positive momentum seen throughout 2018. However, there are signs that this underlying economic activity may not provide the same tailwind to housing as 2018 wears on.

Results show that home prices and rents continued to move higher in April. Respondents indicated that prices have risen for 23 consecutive months and, given their three-and-12-month expectations, see this trend continuing in the near future (1). Rents, have exhibited a similar trend.

Home prices have, at least partially, been supported by an economic expansion, which has been in place since 2010. The recently released Q1 2018 figures indicate that the economy expanded at the fastest pace since 2011, increasing 4.7% from Q1 of 2017 and 2.2% from Q4 of 2018. Data pointed to private consumption and net exports as providing tailwind supporting economic activity in the early part of 2018.

There are signs, however, that growth in Hong Kong looks to slow in the coming quarters. Ignoring personal consumption expenditure (PCE), as this includes spending on private housing, there are signs that the other two main components of Hong Kong’s GDP  exports and investment  may begin to wane.

Net exports: China dependent

It is no secret that Hong Kong’s economy is heavily dependent on mainland China’s, and this is particularly evident in export figures. Mainland China has been the recipient of more than 50% of Hong Kong’s annual exports every year since 2009, suggesting that a slowdown in Chinese demand would likely have a negative effect on Hong Kong’s net-export position.

Despite China’s recent economic outperformance (2), there are reasons to believe that Chinese demand may soon be a drag on growth. The impact of the deleveraging drive from the mainland government has yet to be felt, and is likely to start to bite as 2018 progresses, when mainland Chinese firms have to pay higher credit costs when they re-finance existing obligations.

China’s position in the global supply chain has been a boon for recent growth on the mainland, there are signs too that this may be starting to wane. The World Trade Organization’s leading index for trade, the World Trade Outlook Indicator, showed signs that trade might moderate in coming months, with its forward-looking export orders component index falling below trend (3). This combined with the US economic expansion being in its later stages, and the EU’s expansion peaking, likely signals some moderation in global trade moving forward.

Other indicators point to slowing growth in the near term; Hong Kong’s PMI, a leading indicator of manufacturing and service sector activity. The index slipped into contractionary territory in April, highlighted by weak underlying demand and a slowdown in overseas sales to China.

An increasingly tense global geopolitical environment has increased downside risks to growth more generally. A recent survey by RICS of commercial property professionals had geopolitics rated as the top overall concern. This result has been corroborated by other, similar surveys by various professions (4). Meanwhile, more respondents are reporting, or are expected to report, banks passing on higher costs of wholesale funding to clients in upcoming months.

Investment: targeting mainly real estate

Capital investment is another key component of Hong Kong’s GDP release. Chart six shows trends in Hong Kong’s capital investment, decomposed using a HP-Filter (see Appendix). Headline capital investment is measured on the right axis, while its two main components  building and construction, and investment in machinery, equipment and intellectual property  are measured on the left. Although headline investment has been trending upwards since 2004, since 2013, this has largely been driven by investment in building and construction as investment in machinery, equipment, and intellectual property appears to have hit an inflection point and is now trending lower.

This is a somewhat troubling signal for Hong Kong’s growth outlook. In the medium-to-long-term, this component of investment is one of the key drivers of growth via capital accumulation (such as buying more, or more productive machinery) or investing in R&D to boost innovation (5). Meanwhile, the increase in investment in building and construction is likely at least partially explained by inflation in commercial property prices since 2009.

Additionally, the current trend in business and construction investment, which has been running for about a decade, is beginning to get a "bit long in the tooth". By comparison, the previous uptrend lasted for nearly 12 years (1985-97) and was accompanied by an uptrend in investment in machinery, equipment and intellectual property.

However, this may not be the best comparison for Hong Kong. It is possible that an exogenous shock, such as a "hard-landing" scenario for mainland China, could derail the most recent trend higher in investment. But this does not appear to be priced-in by the market; commercial property professionals in Hong Kong that were surveyed expect capital values for prime-office space in the city to increase more than 7% over the next 12 months (6).

The latest survey results indicate that respondents are similarly bullish for residential prices, forecasting them to rise 4% over the next year (7). And, as shown by Glaeser et al (2008), markets where housing supply is less sensitive to price fluctuations see more sustained increases in prices, and a more limited downside than markets with similar characteristics, but a more liquid supply of properties.

Hong Kong certainly is a market where supply has been unable to keep up with demand, although sales volumes have more-or-less been rising since mid-2016, they have been doing so at a slower pace than prices. So, although a slight downturn in economic activity, combined with higher interest rates, may slow home-price growth as 2018 wears on, a sharp correction barring a major exogenous shock seems unlikely.


  • Glaeser, Edward L., Joseph Gyourko and Albert Saiz, 2008. “Housing supply and housing bubbles,” Journal of Urban Economics, Elsevier, vol. 64(2), pages 198-217, September
  • Helpman, Elhanan, 2005. Mystery of Economic Growth, Harvard University Press, Cambridge MA
  • Hodrick, Robert J. & Prescott, Edward C., 1997. “Postwar U.S. Business Cycles: An Empirical Investigation,” Journal of Money, Credit and Banking, Blackwell Publishing, vol.29(1), pages 1-16, February
  • RICS, 2018. “Bottom of the market seen for retail as expectations turn positive,” Q1 2018: Hong Kong Commercial Property Monitor
  • Thompson, Jamie, 2018. “Oxford Economics Global Risk Survey: Q2 2018.” Oxford Economics Global Research Briefing

Appendix: The HP-Filter

The Hodrick-Prescott filter, or HP-filter, is an economic process used by Hodrick, Prescott (1997) to decompose the trend and cyclical components of time-series data.

  1. Private Consumption Expenditure (PCE) in Hong Kong measures private household spending on goods and services by Hong Kong residents, both domestically and abroad, including housing (which differentiates PCE from other metrics of consumption, such as retail sales. Find out more.
  2. The Chinese economy grew 6.8% on a year-on-year basis in Q1 of 2018 versus market expectations for 6.7% growth.
  3. See WTO website.
  4. See, for example, Thompson (2018).
  5. This is a fairly standard result in modern economic growth theory; for an accessible overview appropriate for a more general audience see Helpman (2005).
  6. See RICS (2018).
  7. Note that this figure is a three-month-moving average to smooth monthly volatility in respondents’ forecasts.