The Hong Kong Monetary Authority has warned that if oil prices remain high and lead to a further sharp increase in US interest rates, this could trigger a jump in local mortgage rates and increase the burden on homebuyers. The banking watchdog, in a paper submitted to the Legislative Council's financial affairs panel, said that interest rate increases since March last year had already dampened the property market. Residential property prices had increased by an average 49 per cent from the trough in the summer of 2003, it noted, but since rates had begun increasing this advance had been reversed. 'Residential property prices declined by 8.7 per cent in November compared with seven months [earlier],' it said. Under the weight of rising borrowing costs, the value of new loans drawn down by homebuyers has now fallen for seven consecutive months, dropping in December by 3.4 per cent to $7.5 billion from the previous month, while the value of new loans approved by lenders dropped 12 per cent to $7.67 billion - the lowest approval value fall since November 2003. The banking watchdog said the significant catch-up of Hong Kong dollar interest rates with US dollar interest rates had now largely been completed but it remained concerned that the present liquidity in the market might encourage lenders to respond to fierce competition for home loans by dropping mortgage rates too far. Lau Shun-cheun, assistant general manager and head of personal financial services at Hang Seng Bank said in theory high oil prices should affect the local economy although in the US this had not yet led to a big rise in inflation. 'I agree that banks should not cut their mortgage rates too far. Although interbank rates have declined recently, if they suddenly reverse upward, it will hit the bank's profit,' he added. Some smaller lenders have adjusted their mortgage rates downward to prime minus 2.5 per cent in recent weeks, amid a sluggish mortgage market, while some of the bigger banks either caught up with this trend or launched new mortgage products designed to lure customers without direct price cutting. However, the HKMA's analysis says the property market as a whole remains far healthier than in 1997.