Hong Kong home prices to drop 5% as unemployment reaches record highs

Knight Frank says there is a strong negative correlation between mass residential prices and unemployment.

Due to the COVID-19 outbreak, we have seen the unemployment figure ramp up quickly in recent months. In the first six months of 2020, there were 240,700 unemployed people, which represents an unemployment rate of 6.2%. With both figures reaching new heights since the global financial crisis in 2008–2009, there has been concern in the market that the worsening unemployment situation could lead to a significant drop in Hong Kong home prices, as it could trigger affordability and even lead to bankruptcy and foreclosure.

To investigate this possibility, Knight Frank looked into the correlation between unemployment and property prices, in particular in periods in recent history in which Hong Kong saw fast growth in unemployment, including the periods after the Asian Financial Crisis (1998–1999), SARS (2003) and the Global Financial Crisis (2008–2009).

The findings show that mass residential prices were strongly negatively correlated to unemployment in all three periods. Moreover, this negative correlation remained consistent with a lag of 1 to 2 months, implying that property prices have a high chance of falling within 1 to 2 months of a rapidly rising unemployment rate. However, the correlation between unemployment and luxury residential prices was lower, with luxury residential prices remaining relatively stable in the past amid rising unemployment.

Compared to Knight Frank's previous findings on the correlation between the HSI and property prices (at 0.79, with 1 being a perfect positive correlation), the correlation coefficient between unemployment and home prices with a lag of 1 to 2 months is even higher (at -0.83, with -1 being a perfect negative correlation), despite being conditioned on a rapid rise in the unemployment rate at particular time points. That said, there could be a strong correlation with short-term house prices, especially since the jobless rate is expected to continue to rise in the next few months amid the COVID-19 situation and other uncertainties.

Here's more from Knight Frank:

Which employment sectors actually matter?

We focused on analysing the impact of unemployment by sector on house prices since 2008, as the Hong Kong economic structure changed significantly after the global financial crisis. By looking further into the correlation between the unemployment rate of individual sectors and property prices, it appears that mass residential prices have been more affected by the unemployment rate (with a coefficient -0.5 < r < -1) in the following sectors:

Among these sectors, unemployment in the banking, finance and insurance, and professional and business services sectors has the highest correlation with house prices, but the current unemployment rate in these sectors remains low. On the other hand, unemployment in the retail, accommodation and food services sectors has the lowest correlation with house prices, but the current unemployment rate in these sectors is high. One could argue that the manufacturing and construction sectors have a high correlation with house prices and currently have a high unemployment rate, but these do not translate into a fall in house prices. First, the impact of manufacturing is limited in Hong Kong, as the sector is small in scale. Second, employment in the construction sector is highly related to the performance of the property sector, so there could be a statistical technical issue known as multicollinearity problem in this respect.

This explains why property prices have remained firm even though overall unemployment is on the rise. If the employment situation in the finance and professional services sectors worsen later this year, house prices could drop.

With the government implementing the Employment Supporting Scheme (ESS) under the Anti-epidemic Fund in the second half of 2020, the situation could be complicated as companies which have participated in the ESS need to take the obligation of not making redundancies during the subsidy period. This discretionary policy will slow down the growth of the unemployment rate and create another structural break of the house prices correlation, thus any implication to the house prices could further be delayed. Over a longer term, however, we believe the correlation between unemployment and house prices continues to hold.

Conclusions

We predict that unemployment will, in 2020, decouple the correlation between the HSI and house prices. Based on our observations below, we expect mass residential prices to drop by 5%.

• The HSI leads residential prices in Hong Kong by 3 to 6 months continues to hold over the long term.
• In the medium term, the high correlation between unemployment and house prices could lead to a structural break in the correlation between the HSI and house prices, especially if there is rapid growth in unemployment.
• When unemployment ramps up quickly, it tends to be a leading indicator of mass residential prices in Hong Kong by 1 to 2 months.
• Unemployment in the finance and professional services sectors tends to have the highest correlation with house prices; while unemployment in the retail, accommodation and food services sectors tend to have the lowest correlation with home prices.