Hong Kong’s Property Market Is a Mess—and the Fed Is Partly to Blame
U.S. rate increases have tamed inflation at home but caused pain elsewhere
4 min
Hong Kong’s notoriously expensive property market is often seen as a barometer of the city’s economy. It isn’t looking good.
Home prices are down. Office vacancy rates have hit a record high. Commercial real-estate investment has plummeted. The shares of some big developers in the city are trading at a 30-year low to their net asset value, a measure of financial health, according to research by analysts at JPMorgan.
A key reason is high interest rates, which have increased the burden on mortgage-paying home buyers, said Cathie Chung, senior director of research at Jones Lang LaSalle, a real-estate services company. The Hong Kong dollar’s peg to the U.S. dollar forces monetary authorities in the city to track U.S. interest-rate decisions, limiting their ability to stimulate the property sector and the wider economy.
The Federal Reserve has embarked on a historic cycle of interest-rate rises since last March, raising the benchmark federal-funds rate from around zero to 5.25% to 5.50%. The Hong Kong Monetary Authority, the city’s de facto central bank, has followed these hikes, increasing its base rate to 5.75% from 0.75% over the same period.
The full impact of higher interest rates in the city still hasn’t been felt, said Asif Ghafoor, chief executive of online real-estate marketplace Spacious. Asking prices of residential properties listed on the platform have fallen 5% since the start of the year. Sales prices tend to follow suit, and are likely to fall 5% to 10% in the next six months, he said.
To prop up the market, the HKMA relaxed mortgage rules in early July for the first time since 2009, allowing home buyers to pay less upfront and borrow more for some properties if they plan to live in them. But those working in the sector think the pain is far from over.
“We expect that the recovery will be slow and long,” said Chung at Jones Lang LaSalle.
The slump in the property market has hurt the share prices of developers, a major source of wealth for some of the city’s richest families. CK Asset Holdings, Henderson Land Development, Sun Hung Kai Properties and New World Development—all still partly owned by the families of the founders—are performing much worse than the wider stock market this year. New World and Henderson Land have lost more than 15% this year, according to FactSet data.
Hong Kong is one of the world’s leading financial centres and is seen by many foreign businesses as a gateway to mainland China. It is now being hit by a slowdown in investment-banking activity—with several large banks cutting staff this year—and the shaky recovery of China’s economy, which has undermined confidence among businesses and potential home buyers in Hong Kong.
The overall vacancy rate for offices reached a record high of 15.7% in the first half of this year, compared with an average of under 5% in 2018, according to figures by CBRE. In the central business district, there was almost eight times as much empty office space as in 2018, when the area had a vacancy rate of just 1.3%.
The equivalent of $603 million was invested in commercial real estate between April and June, according to CBRE data, just a third of the first-quarter tally and the lowest quarterly figure since the end of 2008, when the global financial crisis caused a huge drop in confidence.
Hong Kong’s border with mainland China was reopened earlier this year, but companies from the mainland haven’t grabbed office space in the numbers many had hoped, said Ada Fung, head of office services at CBRE Hong Kong. Flexible working arrangements and geopolitical tensions that have made many companies pause expansion plans are also crimping demand, she said.
The drop in demand is being exacerbated by a supply glut. Developers bought land and started constructing a number of new buildings before 2019, when widespread protests rocked the city and only ended with the passing of a strict national-security law. Demand for commercial property after that was soon undermined by the spread of Covid-19.
This shift in supply and demand is finally giving potential renters the upper hand, said Fung. “It could be a healthy reset,” she said.
There are some reasons for optimism. Retail businesses have increased their demand for commercial property after the reopening of the border with China, which has brought in tourists looking to spend on luxury goods. There is also hope that a recent rise in residential rents could help home prices.
After an exodus of professionals and other residents in recent years, people have started to move to the city, including foreign students and those coming to Hong Kong through government talent schemes designed to reverse a brain drain. That is helping rents pick up after hitting a bottom in the first quarter, and could lead to more demand for properties as investments, said Cusson Leung, head of property research in Hong Kong at JPMorgan.
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Australia’s retail property sector entered 2026 as the strongest performing commercial asset class, but rising geopolitical risks and cost pressures are beginning to test its resilience, according to new research from Knight Frank.
The latest Australian Retail Review shows the sector rode a wave of consumer spending and constrained supply through 2025, delivering total returns of 9.2 per cent and driving transaction volumes up 43 per cent year-on-year to $14.4 billion.
That momentum carried into early 2026, with around $3.6 billion in deals recorded in the first quarter alone.
“Retail clearly emerged as the standout commercial property performer in 2025,” said Knight Frank Senior Economist, Research & Consulting Alistair Read.
“Improving household spending, limited new supply and stronger leasing fundamentals combined to drive better income growth and renewed investor confidence in the sector.”
Spending rebound drives retail strength
A lift in household spending has been central to the sector’s performance. Consumer spending rose 4.6 per cent year-on-year to February 2026, supported by easing inflation and improving real incomes.
That shift flowed directly into retailer performance, with average EBIT margins across major retailers rising to 8.9 per cent in the first half of 2026, their strongest level in several years.
“Stronger consumer spending was critical in restoring momentum to the retail sector,” Mr Read said.
“Retailers have generally been better able to absorb costs, rebuild margins and support sustainable rental outcomes, particularly in higher-quality centres.”
Improved trading conditions also pushed leasing spreads up 4.2 per cent in 2025, reinforcing income growth and supporting capital values.
Geopolitical tensions begin to bite
But the outlook has become more complicated. The report warns that escalating conflict in the Middle East and its impact on fuel prices, supply chains and interest rates could weigh heavily on consumer spending.
“Higher fuel prices, flow-on cost pressures across supply chains, and recent interest rate increases are collectively squeezing household budgets, and early consumer sentiment data suggests confidence is already softening,” Mr Read said.
“While household balance sheets remain generally resilient, heightened uncertainty over future costs is likely to weigh on spending — particularly in discretionary categories — in the months ahead.”
The impact is already being felt in investment activity. While the year began strongly, transaction volumes slowed in March as investors paused amid the uncertainty.
“Early indicators suggest elevated uncertainty has already begun to affect the market. While retail investment enjoyed its strongest start to a year in a decade, with nearly $3 billion transacted by the end of February, activity stalled in March, as investors took a pause amid elevated uncertainty,” Mr Read said.
Solid foundations support medium-term outlook
Despite the near-term headwinds, Knight Frank maintains that the sector’s underlying fundamentals remain strong. Limited new supply, high construction costs and population growth are expected to continue supporting rental growth over the medium term.
“Retail has entered this period of uncertainty from a position of strength,” Mr Read said.
“Supply-side constraints, population growth and improving income fundamentals remain powerful structural supports for the sector.”
The report highlights several trends shaping the year ahead, including steady yields as interest rates rise, mounting pressure on tenant margins, continued outperformance of prime centres, the growing need for logistics integration, and risks linked to underinvestment in capital expenditure.
For now, retail remains a sector with momentum, but one increasingly at the mercy of forces far beyond the shopping centre.
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