China's economy is slowing, and it's taking Hong Kong's once-booming housing market down with it

hong kongA cityscape of Hong Kong is see from the Peak on August 8, 2000, moments after sunset.Bobby Yip/Reuters

  • Hong Kong was ranked the most expensive housing market in the world for eight consecutive years.
  • But property values have fallen sharply in recent months.
  • A slowing mainland economy, trade tensions, and rising interest rates have helped drag prices lower.

One of the world's most expensive housing markets is facing a major slowdown.

Analysts at HSBC dimmed their outlook for Hong Kong's real-estate market on Wednesday, according to a research note. Previously forecasting activity would plateau, they now estimate prices will fall from 10% to 15% over the next six months.

"We expect the first half of 2019 to be a challenging period for the Hong Kong housing market," the analysts said. "Prices have already corrected 8% from the recent peak in August 2018 due to macro uncertainties and several events occurring in the property market that concerned investors."

Hong Kong was ranked the most-expensive housing market in the world for eight consecutive years, benefitting from capital controls in mainland China that incentivize real-estate investments closer to home. But activity has slowed sharply in recent months, with property values falling by the most since the global financial crisis in 2008 in Novmeber.

With China's economy expected to continue to lose steam in coming months, the housing market looks poised to fall further. The second-largest economy has seen sharp drops in recent manufacturing and trade activity, and companies across the world have warned that consumer demand there is waning.

"We suspect that China's economy will continue to weaken this year," said Oliver Jones, an economist at Capital Economics. "Stimulus efforts are not likely to be enough to spark a revival this time around."

Also helping to bring prices down from August highs, a vacancy tax aimed at discouraging investors from holding empty Hong Kong homes was introduced last year.

Still, some are confident residential real estate activity will start to recover despite a slowing economy, with HSBC predicting annual price drops to shrink to between 5% and 10% by the end of the year.

Chinese policymakers have vowed to pursue stimulus measures that could help stave off a downturn. Additionally, the Federal Reserve is expected to increase interest rates at a slower pace than previously expected, which would reduce upward pressure on monetary policy and Hong Kong.

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