With historically low interest rates and affordability at a two-decade high, confidence in residential buying has shown signs of improvement. But a low interest rate environment is usually a result of a deflationary economy - unfavourable to the development of the property market. So what does a low interest rate-environment mean to the local housing sector? Hang Seng Bank chief economist Vincent Kwan said the residential market could certainly benefit from the record low mortgage rates as buyers would see lower financing costs. At present, the mortgage rate stands at about 2.5 per cent, given that most banks have been offering customers a lending rate of 2.5 per cent below prime, now running at 5 per cent. To compete for lending business, some banks have offered a mortgage rate as low as 2.625 per cent below prime. Mr Kwan expected Hong Kong's interest rates to remain at low levels until the third or fourth quarter of next year, following the trend in the United States. Brian Cheung Nam-chung, senior general manager at Liu Chong Hing Bank, said low interest rates usually reflected the deflationary economy but Hong Kong's situation could be different. He said the economy would see a full recovery next year, with economic support from the Central Government. The Closer Economic Partnership Arrangement, and improved tourism and retail industries spurred by mainland travellers would give a boost to Hong Kong, he said. But he added that interest rates would remain at low levels, continuously benefiting the housing sector. Hong Kong's interest-rate moves usually follow the pace of the US. Taking into account the economic situation there, he believed Hong Kong interest rates in the next five years would not see an increase of more than two percentage points, bringing the prime rate to as much as 7 per cent.