Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter. Read more opinion LISTEN TO ARTICLE 4:28 SHARE THIS ARTICLE Share Tweet Post Email

Photographer: ANTHONY WALLACE/AFP/Getty Images Photographer: ANTHONY WALLACE/AFP/Getty Images

Hong Kong’s protests are damping real estate activity, spurring speculation of a long-overdue tumble in the city’s notoriously expensive housing market. Prices are likely to prove more resilient than some expect.

Home transactions have dropped by more than half from this year’s peak in May, before the unrest began, to 3,447 in September and 4,001 last month, figures from the Hong Kong Land Registry show. While the series is volatile, that’s about a fifth below the average number of monthly sales in the past five years. Amid worsening violence in November, the number of transactions in 15 housing estates tracked by Midland Realty International Ltd. slumped 78% last weekend from a month earlier.

With tear gas and transport disruptions an almost daily occurrence across multiple districts, it’s hardly surprising that potential home buyers have been deterred from viewing apartments. Yet a widely followed index of prices compiled by Centaline Property Agency Ltd. has slipped only 4.4% from its high in June. The gauge has actually risen in the past two weeks.

Store of Wealth Hong Kong's real estate prices reached a record high at the end of June and have fallen only slightly since Source: Centaline Property Centa-City Leading Index

Three key factors combine to mitigate against a crash in what is regularly ranked as the world’s least affordable housing market: low interest rates, inadequate supply, and high levels of equity.

Financing remains cheap. Hong Kong’s one-month interbank rate, against which most mortgages are priced, has risen sharply in November, to 2.53% from an average of 1.72% in October. That’s still relatively low on a longer-term perspective, though. One-month Hibor was above 5% in 2007 and peaked at more than 20% in 1998 during the Asian financial crisis, when property prices crashed.

Moreover, many mortgages have a cap that’s determined by banks’ prime lending rates. HSBC Holdings Plc, the city’s biggest bank, reduced its prime rate last month for the first time in 11 years, by 12.5 basis points to 5%. That followed a cut in the Hong Kong Monetary Authority’s base rate. Hong Kong interest rates track those in the U.S. because of the local currency’s peg to the dollar; the Federal Reserve has lowered its target three times since July.

Meanwhile, supply remains constrained. Hong Kong Chief Executive Carrie Lam has announced programs to boost construction of public housing, but these won’t bear fruit for years. Hong Kong has a 10-year supply target of 450,000 homes. Even if achieved, that goal is 10% less than projected demand, according to Bloomberg intelligence analyst Patrick Wong.

Equity Buffer Hong Kong home-purchase leverage has fallen steadily as prices have climbed Source: Bloomberg/Hong Kong Monetary Authority

The third pillar of support is relatively low leverage. Hong Kong home buyers have been forced to finance purchases with an increasing amount of equity as prices have climbed. The loan-to-value ratio for new mortgages dropped to 46% in September, from a peak of 69% in 2002, according to data from the Hong Kong Monetary Authority. The de-facto central bank tightened down-payment rules five times between August 2010 and February 2013 to combat speculation. Loans can finance a maximum 50% of the purchase price for the most expensive properties — those costing more than HK$10 million ($1.28 million) — under current rules.

While low leverage won’t prevent prices from falling, it makes it harder for home owners to fall into negative equity and limits the risk of a self-perpetuating downward spiral of selling. Higher down payments make speculation more expensive and encourage owners to hang on to their real estate even in bad times.

To be sure, there’s more that could go wrong. If the protests persist, they could start to infect Hong Kong’s financial markets, pressuring the currency and stocks. Growing instability could deter mainland Chinese buyers who have been a key driver behind the real estate boom, though their presence has already diminished as a result of anti-speculation measures targeted at non-residents. And a worsening of the U.S.-China trade conflict could tip Hong Kong’s economy deeper into recession.

For the meantime, the market appears to be holding firm. These days, declining sales volumes don’t necessarily translate into a slump in prices. The two have diverged since 2010 when the government started tightening mortgage rules and imposing special sales taxes, according to Cathie Chung, senior director of research at real estate broker Jones Lang LaSalle Inc.

Hong Kong property prices have more than tripled since the global financial crisis, defying repeated predictions of a tumble. No downturn has exceeded 15% in the past decade. This time may be no different.

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