Home prices may face prolonged adjustment due to relative supply surplus

HONG KONG, 18 January 2023 – The housing market will be in the phase of relative surplus between 2024 and 2027, based on the annual average sales of new homes of 16,400 flats (from 2002 to 2023) as a baseline. The housing market may still face a prolonged adjustment period in this phase and the backlog of unsold completed units, according to JLL's latest Residential Market Monitor released today.

Meanwhile, the five major local developers by market cap (Cheung Kong, Sun Hung Kai Properties, Henderson Land, New World Development and Sino Land) saw their share of residential GFA from government land sales rise from 51.9% in 2018-2020 to 61.4% in 2021-2023, with mainland developers being less active in land biddings as before. The situation is expected to continue.

According to JLL Research, due to the long cycle of residential development projects, the supply of housing always lags behind price fluctuations. When property prices are high, commencements of construction increase, and when prices are low, commencements of construction decrease. Hence, the residential completion figure exhibits a cycle that can last around a decade. Using an annual average primary transaction of 16,400 units (from 2002 to 2023) as a baseline, the housing supply cycle can be distinctly divided into two phases: relative surplus and relative shortage. Despite the market being affected by other external, political, and economic factors, property prices generally trended downward during relative housing surplus and trended upward during relative housing shortage. When the three-year moving average (3YMA) for private residential supply stayed above the average primary transaction volume between 1997 and 2007, the overall home price index fell by 12.3%. Conversely, when supply maintained below this baseline between 2008 and 2017, the index surged by nearly 200%.

Norry Lee, Senior Director of Projects Strategy and Consultancy Department at JLL in Hong Kong, said: "Between 2018 and 2023, the 3YMA has consistently exceeded the baseline, and home prices have experienced a 10.4% drop as of November 2023 compared to 2018. We anticipate housing supply to stay above the baseline through the current cycle—from 2018 to 2027, implying the potential of an extended downward price trend due to relative surplus. In the recent quarterly land sale programme, the government withheld residential sites from tender, a move unseen since the land sale programme's inception in 2010, and brought the cumulative anticipated units from the land supply in this fiscal year to 11,530 units, which is below the annual target of 12,900. Such measures to moderate future supply could potentially hasten the end of the current oversupply cycle. However, the market may still face a prolonged adjustment period due to the backlog of unsold completed units."

Cathie Chung, Senior Director of Research at JLL in Hong Kong, said: "In the absence of positive catalysts to boost residential demand, it is anticipated that the sales velocity will continue to be sluggish throughout 2024. Developers are expected to maintain a cautious stance on land bidding, and the sites that rolled over from the current land sale programme could encounter a continued lack of interest in the subsequent financial year, barring any favourable changes in land sale mechanism or demand-side policy. Developers with high gearing ratios have displayed a lack of risk appetite in the land market. Mainland developers, previously significant players due to their aggressive land acquisitions, have scaled back considerably. Their share of the residential Gross Floor Area (GFA) from government land sales decreased from 52.3% during 2018-2020 to just 14.3% in 2021-2023. In contrast, the five major local developers saw their share of residential GFA from government land sales rise from 51.9% in 2018-2020 to 61.4% in 2021-2023. Furthermore, local developers with strong financial positions are capitalising on market conditions. Sino Land Co Ltd, for instance, with a net cash position of HKD 42 billion as of June 2023, has acquired three residential sites in the past three months, including two government land sales in Cheung Sha and Kai Tak, and a redevelopment project in Kowloon City."