Hong Kong's 'frothy' housing market is going to be a major problem

Hong Kong’s latest rebound could end up being just a blip.

On Friday, the Hong Kong Census and Statistics Department reported that the economy grew by 1.6% in the second quarter.

This was above economists’ expectations of 0.5%, according to the Bloomberg consensus, and follows the first quarter’s contraction of 0.5%.

So, just going by the numbers, this seems to look good.

However, the ongoing downturn in the city’s housing sector has economists feeling cautious.

“Looking ahead, we expect growth to slow in the coming quarters. The ongoing downturn in Hong Kong’s property sector, which has looked frothy for some time, is set to be a major headwind,” argued Capital Economics’ China economist Chang Liu.

Notably, home prices in Hong Kong have fallen by about 10% since their September 2015 peak, according to data cited by Capital Economics.

As Business Insider’s Chloe Pfeiffer outlined earlier, real-estate prices had been increasing for years until affordability reached its all-time low in August. Prices started dropping after that, which was then followed by a period of slowing growth and consumption as homeowners’ properties lose value.

Back in late June, BMI Research analysts argued prices will most likely keep falling in the near future, which could lead to reverberations in the financial-services and construction sectors. And Liu expressed similar sentiments.

“With interest rates in Hong Kong — which track those in the US due to the city’s peg to the dollar — set to rise further over the next couple of years, there are good reasons to think that house prices in Hong Kong have further to fall,” argued Liu.

“Declining property prices will continue to drag on consumption and construction in coming quarters,” she continued. “It is noticeable that consumption growth weakened in year-over-year terms last quarter while investment continued to contract.”

Plus, she added, service exports are likely to feel the effects of less spending by Chinese tourists.

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