Rising Fed rates may rein in HK real estate
Mortgage holders like to face a jump in monthly charges
Data pointing to unexpectedly high inflation in the United States could be the albatross signalling the end of Hong Kong's housing recovery, as local banks raise short-term interest rates in line with a newly vigilant US central bank.
Several US Federal Reserve officials last week voiced support for continued increases in official interest rates to quell rising inflation, dashing hopes for a pause after 11 quarter percentage point moves since June last year. The Fed said monetary policy remains 'accommodative' and it had resisted calls to suspend rate increases in the wake of hurricanes Katrina and Rita.
HSBC chief economist for Greater China, George Leung, said he had raised his outlook for Hong Kong interest rates in view of the growing US inflation problem. He now expects a three-quarter percentage point rise in the prime rate before a gradual reduction in rates in the middle of next year.
'We expect further interest-rate hikes given the inflation picture,' he said.
Only weeks ago, HSBC's house view was Hong Kong interest rates had already peaked and would decline slowly next near.
Financial markets expect a rate rise at the Fed's next policy meeting on November 1 and another move in December as well. Hong Kong's prime rates, which move in line with US rates because of the currency peg, could rise to 7.75 per cent. With the discount to prime at which home loans are advanced at 2.25 percentage points, the effective mortgage rate would rise to 5.5 per cent.
Hong Kong prime rates bottomed at 5 per cent in the middle of last year, with banks offering mortgage discounts of 2.75 percentage points below prime. If mortgages rates increase as forecast, home owners would have seen their monthly servicing costs double in 18 months.
Recent data shows higher interest rates are beginning to squeeze home buyers. Third quarter property sales figures show price appreciation in office and residential markets slowing sharply. Compared with the second quarter, office prices in the most recent three-month period rose only 5 per cent, while luxury residential prices fell 1 per cent. JP Morgan forecasts a flattening of capital appreciation in the office sector in coming months, despite rising rental rates, as higher interest costs take their toll.
Property agents said prices for new residential units were also slowing. The premium for new projects measured against old developments in the same area has fallen to 30 per cent from 40 per cent earlier this year. Midland Realty expects the premium will continue to decline, falling to 25 per cent by end of the year.
Further rate rises by the Fed appear likely after US factory data last week revealed manufacturing costs had risen dramatically in recent months. Analysts believe the effects of high energy prices are beginning to work their way through the US economy, pinching energy intensive industries with rising costs that will soon penetrate consumer sticker prices.
Although crude-oil prices eased late last week, prices for refined fuels continued to stir worries, most notably diesel climbed to a record high as the flow of fuel remained disrupted in the southern US.
ABN Amro forecasts the Fed will raise the funds rate by 1.25 percentage points to 5 per cent by the middle of next year. Analyst Eddie Wong said the Hong Kong property market may experience a mild consolidation as rates rise, but should strengthen as the dollar weakens.