Hong Kong property: underestimated population inflow

HK's residential property prices have declined by 28% since 2018, primarily driven by cap rate expansion with rent only slightly below the 2018 level. We think however that property prices are likely to start rising from here driven by falling rates, limited supply, population inflow and rising rents – our models point to 5% CAGR rental growth out to 2030.

Rent has increased but prices have dropped since 2022. We think residential rent is the most important factor when evaluating the health of underlying market supply-demand. Historically, rent has been positively correlated with prices. However, they have decoupled since 2022: the residential price declined ~25% but rent rose 7%.

We attribute the strong residential rent growth in recent years to: 

1. strong population inflow
2. local homebuyers postponing their purchasing decisions, given negative carry, with rental yield of 3.5% lower than time deposits of 4.0% and effective mortgage cost of 4.125%. Now, residential rent is only 2-3% below its 2018 peak.
   

We forecast Hong Kong’s population to reach over 8m by 2030, six years ahead of the Hong Kong government's forecast. Our forecast is based on:

1. Stronger talent, dependant and student inflow during 2024-30
2. Unchanged unemployment rate of 3.0%.

Meanwhile, our birth, death and one-way permit inflow assumptions are in line with the government's projections.

To forecast Hong Kong residential rent, we created a four-factor regression model, which accounts for:

1. the total Hong Kong population
2. the unemployment rate
3. marriages
4. housing stock
   

Our model suggests residential rent will climb further, with a CAGR of +5% during 2024-30, due to strong population growth and a gradual decline in new housing supply.