How Hong Kong’s Covid Troubles Infect Property Investing

(Bloomberg Opinion) -- For those looking to buy a second home as an investment, take a pass on Hong Kong.

Maintenance costs are rising. Your tenant is probably working from home, cooking, washing and cleaning a lot more than before Covid. Appliances break. And good luck finding a plumber or electrician. Repair men are hard to schedule these days, as many catch the contagious omicron variant and take sick leave.

Meanwhile, your rental income may soon not be enough to cover your mortgage payments. Almost all of the city's new loans are benchmarked against Hibor, which has been creeping up. Hong Kong pegs its currency to the U.S. dollar, so when the Federal Reserve starts hiking rates, borrowing costs in the city rise too.

You will have to stretch your math. The rental yield stood at 2.4% at 2021 year-end, according to realtor Centaline Property Agency Ltd. That should cover the 1.6% mortgage rate you could get from, say, HSBC Holdings Plc's local subsidiary, Hang Seng Bank Ltd, which charges a 1.3 percentage-point premium over one-month Hibor.

But not for much longer. Fed fund futures are pricing in about 2 percentage points in rate hikes by year-end, so expect your cost of borrowing to rise in near lockstep. The average 30-year mortgage rate in the U.S. has reached almost 4.7%, the highest since December 2018.

If the futures market is correct on the Fed, by year-end, you will most likely earn negative carry for the first time since the collapse of Lehman Brothers in 2008. It will be a seismic mental adjustment for the city's new generation of landlords.

To make matters worse, this is a renters' market now. Owners are slashing rent to attract and retain good tenants, as the city enters its third month of soft lockdown. Expats are grumpy. Many have left the city for good. Meanwhile, young people, who make up a big portion of rental demand, may be struggling to find jobs right now. Last year, unemployment rate among those aged 20 to 29 averaged at 8.7%, well above the economy's overall 5.5% rate. They might just move home and sleep on their parents' couches.

What's left is the prospect of rising home prices, which seems unlikely. The last time the Fed raised rates, in 2018, home prices fell by about 10% — and that was with economic growth at 2.8%. Now, Hong Kong is poised to enter a recession. Home prices may fall by 20% by 2025, estimates Goldman Sachs Group Inc.

For over two decades, Hong Kong's real estate market has been pretty predictable — on the way up. So in the last two years, whenever the city lifted its social-distancing restrictions, home prices saw a mini-rebound. Some investors might be tempted again, as social life gradually comes back. Weekly transaction volumes at 35 housing estates reached a 45-week high, according to Midland Realty.

But think very carefully this time. If we look further back in history, Hong Kong property is by no means a sure bet. It was in a bear market for years, and many owners were deep under water. Home prices tumbled by two-thirds from their peak before the Asian Financial Crisis in 1997 to the SARS outbreak in 2003.

So don't fight the Fed, and learn to live with a recession. Hong Kong property's got an infection it can't shake.

More From Bloomberg Opinion:

Hong Kong's Covid Policy Is Less Than Zero: Trivedi & Ren
Singapore Property Is Hot Even Without Expats: Andy Mukherjee
Hong Kong Expats, Where's Your Next Destination?: Anjani Trivedi

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.