Should Hong Kong home prices go back to 2012 levels?

Housing market seems to be sticking out.

It has been noted that Hong Kong's housing, office and retail markets have historically been highly correlated but this relationship has become increasingly strained in recent years.

According to a research note from Barclays, with Central Grade A office rents having corrected 15.2% from the 2011 peak and discretionary retail sales having started to drop, Hong Kong's housing market is increasingly looking like the odd man out.

What Barclays finds interesting is that even without projecting forward, over the past six months, Central Grade A office rents and discretionary retail sales have both retraced back to 2012 levels.

While some may argue that housing is different, if the trend holds and the CCL home price index were to retrace back to 2012's average 105.14 level, this would suggest a 27.4% drop from here – some food for thought, said Barclays.

Here's more from Barclays:

Will some of the old relationships re-assert themselves? The Hong Kong housing market had historically been correlated to many things. In addition to being inversely correlated to USD strength, the housing market had also been directly correlated to the office and retail property markets.

Discretionary retail sales already back to 2012 levels: In the first six months of 2015, Hong Kong's retail sales have fallen by 1.6%. But in the discretionary sales category of jewellery, watches and valuable gifts as well as clothing & footwear, retail sales have fallen 11.1% y/y and have now retreated back to levels similar to 2012.

Central Grade A office rents are also back to 3Q 2012 levels: Compared to retail, the Central Grade A office market had corrected even earlier. Versus the recent peak of 2Q 2011, over the past four years, Central Grade A office rents had retreated by 15.3% and are currently at the same level as 3Q 2012 despite tight vacancy of 1.7%.

Food for thought: What if home prices retrace to 2012 levels? In stark contrast, Hong Kong's housing market has so far continued to set record highs. Housing rents have risen 11.5% in 2014 and added another 1.0% in 2015. Home prices have gone up even more, rising 11.4% in 2014 and are up 9.5% in 2015-to-date. While some may argue that the housing market should be different, if home prices behave in the same way as discretionary retail sales and Grade A office rents, a retracement back to the CCL home price index's average 2012 level of 105.14 suggests home prices could pull back by 27.4% – some food for thought.