Last week the Hong Kong government claimed a victory in its battle to halt the city's epic property bull market. Standard Chartered, Hang Seng Bank and HSBC raised mortgage rates for new home loans, triggering immediate drops in home prices.
Centaline Property Agency said some owners cut prices by up to 10 per cent.
For those with their eyes on the trend, last week's rate moves could be seen as the start of the unwinding of Hong Kong's decade-long property bull market, which is firmly in record territory.
This has wide implications for investors. Property is commonly the most valuable asset people own. A big drop in prices would be painful.
Moreover, property stocks are a big component of the local market. If the developers are on the cusp of a radical rerating, this will drag down the Hang Seng Index.
But most significantly, if one believes the mortgage rate change is a sign of a long-term trend for interest rate increases, they have to rethink their whole portfolio. For example, they might want to shift money out of bonds and into something more interest-rate resilient, such as equities.
The rate rise was minor: just 25 basis points, or one-quarter of one percentage point.
Nichole Wong, a property analyst for the brokerage firm CLSA, puts that into context. She says if someone took out a HK$1 million, 20-year mortgage, they would be looking at a monthly mortgage rise of just HK$123, "probably not enough to do dinner at Pizza Hut," Wong says.
The rate rise was also a one-off. In February the Hong Kong Monetary Authority (HKMA) told eight banks to set aside more money against defaults on their mortgage loans. The decision effectively raised banks' cost of lending, which is why they raised their mortgage rates. But banks dealt with the HKMA rule adjustment last week with their tiny rate rise, and they are under no further pressure to raise rates.
So why were property investors so jittery last week? David Ng, a property analyst for Macquarie, a brokerage, says the mortgage rise had a mental effect. It forced investors to consider the day when macro factors will set interest rates on a long-term up-cycle, driving up mortgage costs and driving down property prices.
"From a mathematical point of view, the increase is not that scary - it's way less scary than the 15 per cent stamp duty. But it's the psychological impact. It corrects the public misconception that property prices will rise forever," Ng says.
The rise had an immediate impact on the share price of the big Hong Kong property developers. The Hang Seng Property Index dropped 3.3 per cent over last Wednesday and Thursday, as news of the rate rise percolated through.
Gary Dugan, Asia and Middle East chief investment officer for Coutts, a private bank, says: "You don't bet against the authorities, particularly with the social issues and political problems [of high property prices]. If you are prepared to take a three to five-year view, the property sector should be OK. But if you look at the next 12 months, the government will continue to wale on this sector."
Last week's rate rise also spells trouble for car parks, recently a hot investment among Hongkongers keen to get property-sector returns but who found flat prices daunting. These are, Dugan says, a classic top-of-the-market trade, and they will be vulnerable at the first sign of a downturn. "You shouldn't go anywhere near them," he says.
One set of stocks should do OK from the rate-rise news: that of HSBC, Hang Seng Bank and Standard Chartered. "The moves of the large banks suggest they have pricing power to raise mortgage rates," says Gary Lam, a banks analyst for Citi, an investment bank.
Mid-sized banks should also benefit. They were excluded from the HKMA rules changes, so their rates have become suddenly more competitive without having to absorb a higher risk weighting for their mortgage lending, a win-win for them.
But the larger thematic question for investors is how they should position themselves for an era of rising interest rates. Last week's mortgage rate adjustment was a reminder of just how sensitive Hong Kong property prices are to interest rates. It also focused people's minds on the fact that, at some point, the United States will have to raise interest rates, and it will export its rate rises to Hong Kong.
The evidence in mounting that the US is moving towards an up-cycle in interest rates. The US economy is showing strong improvement in employment and housing prices. Bond investors are looking at the data and pricing in an expectation of higher interest rates.
John Woods, the Asia-Pacific chief investment strategist for Citi Private Bank, says: "More people are coming to the view that the US economy is normalising. This is showing up in higher US Treasury yields."
Rising US interest rates will be the true turning point for Hong Kong investing, and not just for property prices. It will mark out a fundamentally different investing environment. Investors and advisers speak of a looming "great rotation" of assets. In Hong Kong that would involve a massive reallocation of money out of property and bonds, which are highly interest-rate sensitive, and into stocks, which are resilient to rate rises.
Last week's mortgage rate rise was so small but the significance to investors may turn out to be huge.