Residential property prices in Hong Kong could decline by 15% during the next 12 months due to the pressure of interest rate rises and other factors, according to a new prediction by investment group CLSA.

A report last month revealed that the government’s latest cooling measures could lead to a “free fall” in Hong Kong’s property market, and the high-flying residential sector would be particularly vulnerable, especially as other international factors continue to apply pressure.

Hong Kong’s real estate sector has seen a sustained bull run after the median price of homes soared for 26 consecutive months, but steady increases could now be ending as sentiment sours. CLSA expects home prices to drop off by double digits during the next year, as luxury real estate has now become “unaffordable.”

“Hong Kong’s property market is having its worst combination of fundamentals in 15 years with rising interest rates, a slowing economy and a depreciating Rmb,’ CLSA Analyst Nicole Wong noted in a report released earlier this week. She added: ‘Sentiment could deteriorate at any time, as prices are unaffordable. We expect a 15% correction over the next 12 months. 

Several domestic factors have contributed to the negative outlook. The local Hong Kong Interbank Offered Rate has surged in recent weeks and is now set to reach 2% after remaining below 1% for most of the last nine years. A marked drop-off in local stock markets in 2018 and the continued decline of the Chinese yuan has also increased the pressure.

Since the onset of the China and US trade battle, the yuan has fallen against the dollar, making properties in Hong Kong a less enticing prospect for buyers on the mainland. A downturn in expensive real estate could be a concern globally, as it is often a bellwether for economic health.

CSLA’s prediction of choppy waters is a sentiment shared by investment bank Nomura, which said in a report published in early August that mortgage interest rate hikes implemented by banks have resulted in a slowdown in Hong Kong’s residential property sector in the past. Since 2008, similar rounds of increases have resulted in a 5% and 13% fall in the prices of homes.

The country’s long real estate bull run prompted the government to intervene in June in an attempt to stem rising prices and increase supply. A tax on new apartments that are unoccupied and left vacant is still pending legislative approval. However, it appears to have had a psychological impact in tandem with growing geopolitical concerns stemming from the China-US tit-for-tat tariff battle.

While CSLA and Nomura have suggested that a decline is on the cards, others are more bullish about prospects, especially as Hong Kong’s land shortages are unlikely to improve in the near future. Real estate consultancy Knight Frank noted in its latest monthly report that a modest rise in prices through the remainder of 2018 is likely. 

“In light of the government intervention and external uncertainties, we expect home prices to grow at a slower rate in the second half of the year,’ Knight Frank revealed in the report. It added that residential prices will still see an uptick of between 10% and 13% for the full calendar year.

Other experts are even more confident that residential property prices will rise in both the medium and long term. Colliers International released a report last month stating that any new measures implemented by the government are unlikely to have a marked impact on prices. It added: “Looking forward, solid economic fundamentals and a land shortage of 108 ha [hectares] up to 2026 should support price growth of 5-10% per annum for the next five years.”