The US Federal Reserve expects to keep interest rates near historic lows until late 2014. With the currency peg, Hong Kong's low interest rates will likely persist into 2014 or even beyond.
'Although the Hong Kong Monetary Authority (HKMA) asked mortgage lenders to tighten lending to foreign buyers and multi-property owners, banks are under pressure to loosen up credit,' says Sharmaine Lau, chief economist at mortgage brokers mReferral Mortgage. 'Some banks might lower the downpayment requirement to 10 per cent of the property value and they might offer a rate discount of five basis points to borrowers with a good credit standing,' says Lau, citing HKMA mortgage statistics.
Home loans drawn down in December 2011 fell to HK$8.9 billion, but mortgage repayments in the same month amounted to HK$10.1 billion, the highest repayment ratio since March 2009. Lau believes banks are softening the lending criteria on new mortgage approvals in an attempt to achieve the HK$10 billion monthly balance.
'Banks are facing a dilemma themselves,' Lau says. 'They're facing a steep rise in funding costs and so mortgage rates tend to rise over a longer time span. But, some loosening is also needed after a sharp decline in mortgage business. This will lend some support to demand and prices in the near term.'
The government forecasts inflation this year will be 3.5 per cent, while Lau expects mortgage rates to range between 2.3 per cent and 3 per cent per annum for the rest of the year. Hong Kong dollar deposit rates are almost zero.
Home sellers unwilling to sell their properties at lower prices should find holding on to their properties and turning to the rental market a viable option.
According to a Colliers research report, Hong Kong's luxury residential yields ran at slightly lower than an average of 3 per cent per annum from the second quarter of 2009 until the final quarter of 2011.
Compared with the volatile stock market last year, real estate assets, especially prime residential property, remain a relatively safe haven for longer-term investors.
Clara Chu, head of residential leasing at Colliers, says prime residential rents have not fallen sharply as some had feared. 'The latest layoffs in the banking sector did have some impact on tenant demand,' she says. 'Demand from senior bankers with rental budgets in excess of HK$200,000, has plummeted. But the mid- to upper-range, where monthly rents fall in the HK$120,000-HK$200,000 range, did not shrink.'
She adds that the stronger rental housing demand from global retailers, which are a direct beneficiary of a robust retail sales market, makes up for the weakness in demand from bankers.
Though prices remain close to the 1997 peak levels after a recent correction, the cost of ownership is about 40 per cent that for 1997, according to Centaline Property Agency's housing affordability index.
The Centa-City Leading Index, compiled by Centaline, indicates that average home prices across the board as at mid-February were only 5.3 per cent below the last peak registered in July 2011.
Wong Leung-sing, an associate research director at Centaline, attributes the resilience to the distortion caused by the special stamp duty (SSD), which taxes short-term selling heavily.
'The market is being heavily distorted by the SSD,' he says. 'A sustainable market should be made up of the right mix of owner-occupiers, long-term investors and a small proportion of speculators. But apparently speculators have been evicted.'
During the global financial crisis in 2008, the immediate price correction was triggered by an exodus of speculators who were in a rush to lighten their portfolios, which explains why prices fell 20-30 per cent in a few months, according to Wong.
Despite the rebound in February sales resulting from the pent-up demand during the Lunar New Year hiatus, Wong expects home sales volumes to hover at low levels on a year-on-year basis until after Easter, when dust settles over the appointment of the city's new chief executive, while waiting to see how the euro zone debt crisis plays out. He believes a price slump by then is unlikely.
However, Thomas Lam, head of Greater China research at Knight Frank, forecasts that luxury property prices will fall 10 per cent this year, supported by supply constraints in prime locations. He believes prices in the mass market will fall 10-15 per cent because of an expected rise in supply of small- and medium-sized units.