What does the current rent-to-sale ratio in Hong Kong mean for first-tier cities, now that the property market has stabilized?

Against the backdrop of the stabilization of Hong Kong’s property market, the core indicator for assessing property valuation—rent-to-price ratio—has garnered more market attention, providing a reference coordinate for observing first-tier cities in mainland China.

According to a report released by SDIC Securities on November 6, since the second quarter of 2025, the second-hand housing market in first-tier cities has been undergoing price adjustments. Prices of relatively new properties (completed between 2018-2025) dropped from 116,872 yuan/sq.m in Q2 to 99,169 yuan/sq.m in Q3, a single-quarter adjustment of 15.1%. In contrast, first-tier cities’ new home prices demonstrated greater resilience, with a decline of only 0.6% since the start of the year.

Meanwhile, Hong Kong's property market shows a marked recovery trend. Latest data from Hong Kong’s Rating and Valuation Department reveal that the private residential price index in Hong Kong has risen for four consecutive months, with a month-on-month increase of 1.32% in September, while the rent index has risen for ten months in a row, reaching a record high.

Currently, the pattern of Hong Kong’s rental yield exceeding mortgage interest rates not only improves investment appeal but also provides solid support for price stabilization. This stabilization process has lasted 15 months, driven by both falling transaction costs and declining interest rates. According to estimates by Northeast Securities, the net rental yield for mid-to-high end residential property in Hong Kong is 3.04%, and up to 3.59% for older units. On an international comparison, sample net rental yields in Tokyo, Hong Kong, New York and other cities typically reach about 3%.

Furthermore, Liang Zhonghua at GTJA Haitong Securities believes property returns come from two components: one is rental yield, and the other is price volatility, i.e., capital gains. Most importantly, it is the expectations of housing price stabilization, which are, to a great extent, determined by expectations of macro inflation, since changes in property, stock, and bond prices are essentially a “reflection” of the real economy.

SDIC Securities: First-tier City Markets Show Structural Adjustment Characteristics

SDIC Securities pointed out in a report on the 6th that the essence of divergent prices in core cities reflects the focused release of structural market contradictions under previous price caps. During the implementation of price caps, developers shifted to high turnover models, significantly increasing new home supply. The large volume of price-capped new housing, after about two years of delivery cycle, will be concentratedly converted into relatively new second-hand housing in the market around 2025.

Data shows that second-hand housing prices in first-tier cities have adjusted since April 2025, with a cumulative adjustment of 4.4% up to now, while older properties saw relatively smaller declines. At the same time, new home prices in first-tier cities saw a year-on-year drop of 0.7%, much narrower than 2024’s -3.8%, indicating a divergence between different market segments.

Two Key Factors in Hong Kong’s Property Market Recovery

The recovery trajectory of Hong Kong’s market offers a useful case for observing market stabilization. Latest data from the Rating and Valuation Department shows private home price indexes have risen for four consecutive months while the rental index has surged for ten straight months to new highs.

Northeast Securities in its report of November 10 pointed out two main reasons behind this:

First is the policy shift that created necessary conditions for market stabilization. In February 2024, the Hong Kong SAR Government announced a full “withdrawal of property market cooling measures”—removing all demand-side controls, such as Additional Stamp Duty, Buyer’s Stamp Duty, and New Residential Stamp Duty. This substantially reduced transaction costs; for example, purchasing a property worth HK$10 million would see costs cut by HK$1.5 million. Although the effect was not immediate, after a digestion period of about 15 months, recovery signs started to appear in mid-2025.

Second is the substantial drop in borrowing costs, forming a sufficient condition for recovery. At the start of the “withdrawal”, mortgage rates in Hong Kong remained high and the market was slow to rebound. But with a strengthening Hong Kong dollar, the HKMA injected liquidity, dropping one-month HIBOR from 3.98% at the start of the year to 0.57%. Since most Hong Kong mortgages use the “H plan” (HIBOR+1.3%), actual mortgage rates fell to around 2%. Meanwhile, the Fed’s rate cuts also created a more accommodative environment for Hong Kong. Lower financing costs directly stimulated homebuyer demand; for a HK$3 million loan, monthly repayments now are nearly HK$2,000 lower than a year ago.

Net Rental Yield Levels in International Cities: Typically Around 3%

As housing prices adjust, property “rent-to-price ratio” becomes increasingly significant as a key indicator of the “residential attribute” value of real estate.

Northeast Securities calculated rent-to-price levels using representative properties in different cities. Using net rental yield as an anchor (deducting property holding costs), net rental yields for mid-to-high end sample residential properties in Tokyo, Hong Kong, New York were 2.96%, 3.04%, and 2.97% respectively; for older properties, the rates were 3.71%, 3.59%, and 3.40% respectively.

For example, in Hong Kong, mid-to-high end property uses “EIGHT MANSIONS” in Central/Western (Mid-Levels) as a sample: unit price is HK$23,806/sq.ft, monthly rent is HK$72/sq.ft, yielding about 3.63%. Older sample uses Whampoa Garden on Baker Street in Kowloon City: price is HK$12,471/sq.ft, monthly rent is HK$43/sq.ft, yielding about 4.14%. After deducting management fee, government rates, land rent, net rental yields for EIGHT MANSIONS and Whampoa Garden are 3.04%-3.59%. This methodology allows for comparability across regions and countries.

Choosing rental yield over a simple rent-to-price ratio mainly considers differences in holding costs across countries and regions. Compared to mainland China, Hong Kong pays rates and land rent; overseas, property holding costs are also high—Japan pays fixed asset tax and maintenance reserve, the US pays property tax and mortgage insurance.

Is Rental Yield the “Anchor” For Housing Prices?

Rental yield measures the annual total rent from letting out a property versus its current market value. The price-to-rent ratio is similar to the P/E ratio in stocks—essentially assessing property valuation. Although many see a rising rental yield as a signal of price stabilization, is it a reliable anchor? Liang Zhonghua at GTJA Haitong Securities adopted a more cautious view.

Liang Zhonghua stated, property returns come from two sources: rental yield and capital gain from price movement. When price appreciation is expected, rental yield becomes unimportant. When price declines are expected, only a sufficiently high rental yield can offer enough compensation to make an investment worthwhile.

From international experience: after US house prices entered a downtrend in 2007, it wasn’t until 2012 that they stabilized. During this period, US Treasury yields dropped below 2%, while rental yields exceeded 6%. Japanese real estate entered a downcycle in 1991, and only began to recover after 2004; rental yields for Tokyo properties were above 5% in that period.

Liang Zhonghua’s team studied property crises in 13 economies and found a common pattern: once house prices enter an adjustment cycle, valuations return to historic lows—i.e., rental yields return to historic highs. This pattern is also observed in the stock market.

GTJA Haitong Securities stated:

Therefore, relying solely on rental yield rising to historic highs to stabilize property prices will be a long process. The most important thing is to stabilize price expectations. And expectations for housing prices largely depend on macro inflation forecasts, since the changes in real estate, stocks, and bonds are essentially “reflections” of the real economy.

Since last September, we have observed China’s macro policies increasingly focusing on boosting expectations; ‘anti-involution’ policies also aim to boost inflation, and policy direction is now correct. Sustained policy efforts will be key in stabilizing housing prices and domestic demand. If households’ expectations on future incomes and inflation rise, so will price expectations, and property price stabilization will be just around the corner.

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