Residential property prices in Hong Kong are set to rebound next year thanks in large part to lower interest rates, though a large cache of unsold inventory will keep a cap on gains.
“We expect Hong Kong home prices to be up 5 per cent in 2025,” said Praveen Choudhary, head of Asian gaming and lodging and Hong Kong real estate research at Morgan Stanley. “This is significant since it would be the first annual price increase in the last five years, during which time property prices have corrected by roughly 25 per cent.”
“The biggest driver for the price increase in 2025 will be the lower US [interest] rates.”
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On Friday, the Hong Kong Monetary Authority (HKMA) lowered its base rate to 5 per cent from 5.25 per cent – the lowest point since February 2023 – following a quarter-point cut from the US Federal Reserve to 4.5 per cent. Subsequently, six major Hong Kong lenders reduced their prime lending rates for the second time this year, which trimmed borrowing costs to their lowest level in two years.
Morgan Stanley said by the middle of next year, mortgage rates will be lower than residential rental yields, resulting in a positive carry – making a profit by investing in assets using borrowed capital – the most important driver of a property price inflection.
The reduced rates of Hong Kong banks will lighten the burden on mortgage borrowers by about HK$709 to a monthly payment of HK$22,803, according to local mortgage broker mReferral, based on a typical HK$5 million (US$643,000), 30-year loan at prime rate minus 1.75 per cent.
The latest residential mortgage rate declined to to 3.63 per cent from 3.88 per cent and has already achieved a neutral carry as the latest rental yield is at 3.6 per cent, said Mark Leung, a Greater China property research analyst for UBS.
“We think in the near-term, Hong Kong’s mortgage rate will continue to decline along with the US Fed cuts, as the two recent rounds of prime rate cuts have shown strong determination from both the Hong Kong government and banks to protect Hong Kong asset prices,” Leung said.
Headwinds to a more forceful recovery in the city’s residential property sector include various risks posed by Donald Trump returning to the White House, as well as a nagging pool of unsold inventory that is hanging over the market.
Leung said Trump-related downside risks include “a potential surge in the unemployment rate due to macro uncertainty, including US tariffs”, adding that the outlook for interest rates will become more uncertain “if US inflation picks up”.
The city’s property market will also depend on how well Hong Kong and China perform economically, according to Xavier Lee, an equity analyst at Morningstar.
“The strength of Hong Kong housing demand will still be dependent on the strength of Hong Kong and China’s economic performance,” he said. Rate cuts from the Fed, HKMA and local banks in September, paired with stimulus measures from Beijing, triggered a stock-market rally in Hong Kong and China; the benchmark Hang Seng Index is up 24 per cent so far this year.
Home prices, however, have yet to bottom out. Prices for the city’s lived-in homes fell by about 1.7 per cent in September to their lowest level since August 2016, according to data from the Rating and Valuation Department on Tuesday. Prices have slumped 28 per cent since hitting an all-time high in 2021 and are down 7.5 per cent this year.
Prices will remain soft through the first half of next year as developers continue to clear inventory, Morningstar’s Lee said. Some analysts have forecast an increase in home prices of up to 5 per cent next year, while some property consultancies are still adjusting their forecasts and assessing the impact of rate cuts.
“The level of unsold inventories will stay high in the near term, and developers will still remain conservative in pricing, instead of increasing prices,” said Raymond Cheng, managing director of CGS International Securities. “But it is unlikely home prices will continue to drop.”
Some 108,000 first-hand units may be available in the coming three to four years, according to a calculation from the Housing Bureau at the end of September.
Buying momentum will continue to build up thanks to additional interest rate cuts through 2025 and increasingly attractive property yields driven up by rising rents, Lee said. The rate cut in September lifted home sales in Hong Kong to their highest level in five months in October, reversing a two-month decline, according to data from the Land Registry.
More from South China Morning Post:
- Hong Kong home prices slump to the lowest level in 8 years, but rents rise
- HSBC, 5 other Hong Kong lenders cut rates to lowest level in 2 years
- Hong Kong banks cut prime rates by a quarter point in first drop in funds cost in 5 years
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