We have noticed a sharp increase in the unemployment rate in recent months as a result of the COVID-19 epidemic. There were 240,700 unemployed people in the first half of 2020, which equals a 6.2% unemployment rate. There has been concern in the market that the worsening unemployment situation could cause a significant drop in Hong Kong home prices because it could affect affordability and even result in bankruptcy and foreclosure. Both numbers have risen to new heights since the global financial crisis in 2008-2009.
The Asian Financial Crisis (1998–1999), SARS, and other recent events that caused rapid increases in unemployment in Hong Kong were studied by Knight Frank to determine whether there was a relationship between the two variables.
The results demonstrate a strong negative correlation between mass residential prices and unemployment in each of the three time periods. Furthermore, this negative link persisted with a lag of 1 to 2 months, suggesting that there is a significant likelihood that property values may decline within 1 to 2 months following a sharply rising unemployment rate. The relationship between unemployment and the cost of luxury homes was less pronounced, and in the past, luxury home prices held steady despite rising unemployment.
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) than Knight Frank's earlier findings on the correlation between the HSI and property prices (at 0.79, with 1 being a perfect positive correlation), despite being dependent on a sharp increase in the unemployment rate at specific time points. However, given that the COVID-19 issue and other uncertainties are projected to cause the unemployment rate to rise over the next few months, there may be a significant association with short-term property prices.
More from Knight Frank is provided here:
Which industries genuinely affect employment?
As the economic structure of Hong Kong underwent major upheaval during the global financial crisis, we concentrated on assessing the effect of unemployment by industry on housing prices since 2008. Further research on the relationship between the unemployment rate in various industries and property prices suggests that the following industries have seen the greatest impact on mass residential prices (with a coefficient of -0.5 r -1):
The largest association between unemployment and home prices among these industries is seen in the banking, finance, and insurance, as well as the professional and business services sectors, yet these industries nevertheless have low unemployment rates today. However, the association between unemployment and home prices is lowest in the retail, lodging, and food services industries, where the unemployment rate is currently high. Although the manufacturing and construction industries have a strong association with home prices and have a high unemployment rate right now, this does not result in a decline in home values. First, the modest size of the manufacturing industry in Hong Kong limits its influence. Second, there is a strong correlation between employment in the construction sector and the performance of the real estate market, hence a multicollinearity problem, a statistical technical difficulty, may exist in this regard.
This explains why, despite rising unemployment generally, real estate values have held steady. House prices could decline if the state of employment in the financial and professional services sectors worsens later this year.
The issue could become problematic as the government implements the Employment Supporting Scheme (ESS) under the Anti-Epidemic Fund in the second half of 2020. Companies that have participated in the ESS must accept the responsibility of not creating redundancies throughout the subsidy period. Any impact on the home prices could be further delayed as a result of this discretionary policy, which would reduce the increase in the unemployment rate and cause another fundamental break in the correlation between house prices. But in the long run, we think the relationship between joblessness and home prices is still valid.
Conclusions
In 2020, we project that unemployment will break the relationship between the HSI and home prices. We anticipate a 5% decrease in mass residential costs based on the observations we've made below.
Residential price trends in Hong Kong are led by the HSI by three to six months, and this trend has persisted over time.
In the medium term, there may be a structural break in the association between the HSI and home values due to the significant correlation between unemployment and housing prices, particularly if unemployment increases quickly.
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