Fears of a HK property slump are overblown

PUBLISHED : Monday, 04 April, 2011, 12:00am
UPDATED : Monday, 04 April, 2011, 12:00am


Saturday's edition of the South China Morning Post carried a story that will have frightened some people, and delighted others.

'Property market slides as rates rise' blared the front page headline. The story beneath revealed that Hong Kong flat prices fell by 1 per cent over the previous week, after local banks raised interest rates on mortgages. Further rate increases and price falls were on the way, the story said. 'Prices may dive 30 per cent by end of next year,' warned the sub-head.

For anyone who has bought a Hong Kong apartment in the past few months, this story will have sounded like grim news indeed, threatening them not only with higher monthly mortgage payments, but with a steep fall in the capital value of their investment.

On the other hand, to anyone hoping to buy but priced out of the market, the story will have sounded encouraging, holding out the prospect of more affordable homes in the near future.

On closer examination, however, both these hopes and fears appear exaggerated.

First of all, what actually fell 1 per cent was the Mass Centa-City Leading Index, a measure of preliminary contract prices on secondary market deals in the city's biggest estates transacted through the Centaline property agency.

The broader Centa-City Leading Index slipped by a more modest 0.75 per cent.

That still sounds troubling, but it is nothing unusual. A quick look at the weekly data for the past 12 months shows that the index fell on 17 occasions. In other words, this particular index typically falls on one week out of every three.

Nor was the magnitude of the latest fall anything out of the ordinary. In December the index dropped by 2.2 per cent over a two-week period.

In other words, an occasional dip in the index is only to be expected. After all, prices have still climbed by almost 24 per cent over the past year. At this point, the latest fall is nothing more than noise ( see the first chart below).

But what about the recent rise in mortgage rates?

Well, yes, it is true that in recent weeks Hong Kong banks have increased the premium over interbank rates that mortgage borrowers have to pay.

But it's important to see these increases in perspective. The week before last Standard Chartered, for example, increased its mortgage rates from between 0.8 and 1 percentage points over Hibor, to between 0.9 and 1.2 percentage points over Hibor.

For the past couple of weeks one-month Hibor has been trading at 0.21 per cent (see the second chart), which means that at most mortgage interest rates have gone up from 1.21 per cent to 1.41 per cent.

According to the Hong Kong Monetary Authority, the average size of a mortgage in the city is HK$2.42 million, which means the banks' premium increase has pushed the average cost of mortgage interest payments from HK$2,440 a month to HK$2,843. That's an increase of HK$403 every month, or HK$13 a day, less than the price of a cup of coffee.

You can argue that the price of a cup of coffee is not to be sniffed at. But it's hardly enough to trigger a crisis of confidence in the property market. The truth is that even after the latest rate increases, the cost of servicing a mortgage is still lower today as a proportion of monthly household income than at any time during the 1990s (see the third chart).

Of course, at some point US interest rates will start going up again, which will put upward pressure on Hong Kong mortgage rates and drive home prices lower.

But with core inflation subdued in the United States and unemployment still running at almost 9 per cent, significant interest rate increases are a distant prospect.

In the meantime, with interest rates on Hong Kong dollar savings deposits at just 0.01 per cent, mortgages cheap and the rental yield on Hong Kong apartments at a relatively attractive 2 per cent, it will continue to make sense for the city's residents to take their savings out of the bank and use them as the down-payment on a new flat.

In other words, nothing much has changed. Despite Saturday's headline, logic decrees that Hong Kong's home prices will remain high and probably rise further. Hopes and fears of a big fall in the near future are misplaced.