Caution rules amid rates and slump worries
Alex Frew McMillan
Chris Lane and his wife, Karen, are keen to buy a property in Hong Kong to prepare for their return from Japan, where they've been working in the ski resort town of Niseko. They recently added a baby daughter to the family, and would like to come back to the town of Karen's birth.
But they're expressing the kind of caution that's increasingly common in the Hong Kong property market at the moment. If they do buy they'd like to get a bank loan, but are worried interest rates will rise. They also wonder if the market may be in the first lurch of a downward turn.
'I want to buy a place to live in and I don't want to pay someone else's mortgage,' said Lane, who has been working in Japan as a property broker. 'But I'm worried that prices will drop within a year. Would it be better to rent for a year and buy at a 30 per cent discount in a year?'
They are not alone in their hesitation. With banks making their mortgage terms less attractive, and interest rates moving off their all-time lows, the cost of borrowing is on the rise. Uncertainty over the direction of the market after such a bull run is also putting people off - a shift in sentiment from a strong start to the year.
'Market momentum has changed from the first quarter,' said Sharmaine Lau Yuen-yuen, the chief economic analyst with mortgage brokerage mReferral. 'The primary market was selling at quite a good pace but since April the atmosphere has turned around quite a bit.'
The mortgage brokerage reports that mortgage applications dropped by 11.6 per cent in April compared with March. The decline mirrored similar trends in the number of property transactions, with 7,635 residential units changing hands in April - down 27 per cent compared with March and 38 per cent from the same month last year.
That's sure to spill over into bank lending. 'We believe the May figures are going to drop further,' Lau said. 'For the mortgage market, another drop of 5 per cent to 10 per cent could happen.'
Banks have made terms less attractive on mortgages based on the Hong Kong Interbank Offered Rate (Hibor), which dominate the market. Until recently it was possible to get a mortgage at Hibor plus 0.8 per cent. But in early March, HSBC led the way in offering less attractive terms - now at Hibor plus 1.0 to 1.5 per cent - and others soon followed suit. Hang Seng took the most drastic step, effectively ending its Hibor-based loans.
'Interest rates have been too low for too long a period, so the banks are trying to increase their profit margins, and increase the interest rates a little bit,' Lau noted.
Hibor loans may have peaked in their popularity. Having reached a record high of 92.2 per cent of all new loans issued in January their share fell to 91.7 per cent in March.
Though the decline is a small one, the change in direction is significant given that this form of borrowing has soared in popularity from just 3.8 per cent of the mortgage market in early 2009. Prime-based mortgages dominated at that time but now amount to only 7.4 per cent of new loans - though that's again on the rise.
Paul Carter, senior finance consultant at mortgage broker Complete Ltd, a subsidiary of IP Global, notes that prime- and Hibor-based loans now have similar effective starting rates, with Hibor-based plans working out at an interest rate of around 1.7 per cent and prime-based plans around 2.0 to 3.0 per cent.
Banks have been offering better incentives on prime-based plans in terms of cash-backs on signing a mortgage, however, and Hibor is also more volatile in times of crisis and may move higher, faster.
'Hibor is going to rise as soon as the United States starts raising rates,' said Carter. But because Hong Kong banks have not cut their prime rates below the present range of 5.0 to 5.5 per cent, while US interest rates sank close to zero, 'there is room for the banks to hold prime steady'.
Fixed-rate mortgages, which have been virtually forgotten for long periods of time in Hong Kong, are meanwhile making headway, driven by the strong likelihood of higher interest rates over the next year or so.
The last time fixed-rate plans showed any traction in Hong Kong was in early 2004, during the rebound from the severe acute respiratory syndrome health scare, when the recovering economy made a rise in rates likely.
Indeed, fixed-rate loans went on to peak at 15.4 per cent of new mortgages at the time but have only seen a couple of blips in popularity since and now account for less than one per cent of new loans.
Complete Finance says it can arrange fixed-rate mortgages at between 2.5 and 3.0 per cent for the next three years, while mReferral cites a fixed rate of 2.38 per cent for three years.
While more expensive than current Hibor or prime-based rates, fixed-rate plans offer security if the US economy shows unexpected strength and the Federal Reserve gets more hawkish.
'We know interest rates are going to start to rise, whether that's at the end of Q4 this year or start of Q1 next year,' Carter said. 'I like fixed rates; I like to know what my mortgage is going to be for the next two, three, five years - for however long you can fix it for.
'But there are a lot of gamblers in Hong Kong. People like a gamble out here.'
Standard Chartered and Citibank are both offering fixed-rate plans, with the tenure normally set at 36 months, and penalties for early termination.
'The gamble is that the US doesn't raise interest rates for an extended period of time,' Carter said. 'You are really betting on the US economy not recovering as quickly as expected.'
Lane, originally from the US, is more worried about a bubble building and bursting in Hong Kong. Though he feels long-term prospects for property are good, he is afraid of buying at the peak of the market.
'The Hong Kong market is such a hard market - it's more like an equity index than a property market,' said Carter, who is keen to buy a home in Clearwater Bay in the next year or so. 'If buying for yourself, you're looking to pay your mortgage off in 25 or 30 years. It's a long-term investment.'
The level by which the average price of a home has increased since its low in 2009, leading to fears of a bubble and a rapid decline