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The real estate rally in Hong Kong appears to be short-lived due to a sales decline

(Bloomberg) — Hong Kong’s real estate market is slumping again, just three months after government tax breaks sparked a brief rally.

New home sales fell 46% in May from a month earlier, even as the city’s developers offered discounts on apartments to lure buyers. On the secondary market, sales fell by 40% in the first weekend of June compared to the previous one.

The dip underlines the challenges facing Hong Kong’s housing market. It’s a reversal of the three-year high in transactions we saw in March, after the government lifted all purchasing restrictions to help the sector.

With interest rates remaining high for longer than expected, buyers remain on the sidelines, said Sam Wong, equity analyst at Jefferies LLC.

“Everyone expected the momentum to slow down,” Wong said. “There is no way we will have HK$10 billion (US$1.3 billion) in sales every week forever.”

The weak economy and bleak outlook for salary growth are also deterring buyers and pushing down prices, he added. Wong expects home values ​​to decline by low single digits in the second half of the year.

Expensive rates

Prices of used homes have fallen 2.3% since the start of the year, Centaline data shows.

The average mortgage rate in Hong Kong was 4.16% in March, more than double the 1.72% two years ago, according to data from mReferral Mortgage Brokerage Services.

Banks have withdrawn financial incentives, with HSBC Holdings Plc and Bank of China Ltd. have all but eliminated cash rebates on home mortgages as the company’s yields decline, said Eric Tso, principal vice president at mReferral. Borrowers received discounts of about 3% on home loans last year, he added.

To mitigate risks, lenders are also examining mortgage applications from buyers in mainland China, which accounted for 57% of new home sales by value in April, according to Midland Realty.

Sufficient supply

In the longer term, the revival of housing supply in Hong Kong will put pressure on prices. The city is expected to complete about 19,000 private units annually between 2023 and 2027, compared to 9,900 units between 2007 and 2012, according to data from Our Hong Kong Foundation.

It is not possible that the market can rise as much as it has in the past two decades due to the increase in land and housing, said Mark Leung, analyst at UBS Group AG.

To increase housing prices in the early 2000s, the government halted land sales and halted the conversion of areas for housing development. The subsequent price hike made Hong Kong property unaffordable for many, leading to social grievances. Since then, the government has stepped up residential land development to ensure sufficient housing supply.

“Now things are different,” Leung said. “It is difficult for prices to rise as much as before.”

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