Morgan Stanley abandoned its “too optimistic” call for Hong Kong residential property values to rebound this year, and now sees the market suffering two additional annual declines.

The Wall Street bank expects home prices in the Asian financial hub to fall 3% in 2023, in contrast with a previous forecast for an increase of 8%, analysts Praveen Choudhary and Jeffrey Mak wrote in a research note Wednesday. That follows a 16% tumble in 2022, according to the bank.

In addition, Morgan Stanley sees another 5% to 10% drop in average selling prices for 2024. It blamed stretched affordability, an increase in land supply, negative rental carry — where costs exceed income — and a weakening in sentiment against a backdrop of an equity market heading for a fourth straight annual decline.

If prices keep falling next year, Bloomberg Intelligence has calculated that the share of Hong Kong mortgage loans that exceed the property’s value are likely to reach their highest since 2005.

Rising interest rates have already been weighing on the city’s home market, with used-property values falling 18% from their peak in 2021, according to data from Centaline Property Agency Ltd.

Price Targets

Morgan Stanley’s view on the Hong Kong real estate has shifted to “in-line” from “attractive” as the sector is caught between higher interest rates from the US and slower growth from China. The bank cut its price targets for local property developers by 19% on average.

The US bank downgraded Wharf Holdings Ltd. to underweight from overweight on “a challenging operating outlook across its major business segments.” It prefers CK Asset Holdings Ltd., Sun Hung Kai Properties Ltd. and Sino Land Co.

Wharf Real Estate fell as much as 3% on Friday, the most since Oct. 3. CK Asset, Sun Hung Kai Properties and Sino Land each fell more than 1.5%.

--With assistance from Abhishek Vishnoi.

(Adds stock moves in last paragraph.)