Hong Kong housing prices could fall 25 percent next year if the trade war between the United States and China worsens, real-estate and investment management company JLL has warned.
The forecast is the latest bearish call for what is traditionally one of the world's most expensive real-estate markets.
About 7.4 million people are packed onto mostly small, hilly islands and a jagged peninsula in southern China.
Real estate in Hong Kong is closely watched as a key indicator of the health of the broader economy.
The market is entering a "correction phase" and prices have the potential to decline further, JLL said in a release on Tuesday. The baseline forecast is for a 15 percent fall in 2019, but a 25 percent drop in prices is possible if the trade war heats up further and stock prices continue to decline, it added.
JLL cited the tariff conflict as among factors hurting business confidence and helping contribute to a more than 20 percent decline in the Hong Kong stock market since this year's January peak.
"All of Hong Kong's property sectors have become reliant on China’s demand to underpin growth in recent years," Joseph Tsang, JLL executive director in the city, said in the release. "A protracted U.S.-China trade war has the potential to affect Hong Kong's economy and property market."
High borrowing costs
Analysts say prices have already fallen about two percent since the market peaked in August, and JLL's negative outlook is hardly the first. UBS said in a recent report that housing prices in Hong Kong are the most overvalued and at the greatest risk of collapse.
CLSA said in August it expected a 15 percent fall in prices over the next 12 months. It kept that view in a report last month, citing rising local interest rates, depreciation in the Chinese yuan and concerns over the economic outlook.
A weaker yuan against the U.S. dollar makes Hong Kong property less attractive to mainland Chinese buyers. The Hong Kong dollar is pegged to the U.S. currency in a narrow band and thus tracks the greenback's movements.
That also helps push Hong Kong borrowing costs higher due to tightening by the U.S. Federal Reserve, which is raising its key interest rate to avoid overheating in the world's largest economy.
"All the macro factors are out there," Peter Churchouse, CEO of Hong Kong real-estate investor Portwood Capital, told CNBC on Wednesday.
Churchouse expects the price decline to end up at about 15-20 percent through the end of 2019.
But Hong Kong is well placed to take such a hit, he noted, as households, property developers and banks are all in good financial shape. Banks and property developers are not highly leveraged and households have low debt and high savings levels.
Hong Kong has also experienced far worse before, Churchouse said, citing 60-70 percent declines in real estate prices between 1997 to 2003 — a period which included the Asian economic crisis and outbreak of severe acute respiratory syndrome, or SARS.
Given that residential prices have tripled since the global financial crisis, even a 20 percent decline is no major cause for worry, he added.
"Of course, the affordability is likely to be much improved if we see a correction of that kind," Churchouse said. "So that could bring buyers back into the market. I don't think we should be fundamentally or systemically concerned."
Translated by Vanessa