THE heady days of rampant house-price inflation in Hong Kong could soon come to an end. Not because of banks' ever-tightening mortgage lending restrictions, or the Government's stamp duty on transactions, but because some of the fundamentals that have always been the strength of the Hong Kong residential investment market could be on the way out. The biggest threat of all is rising interest rates. A repeat of the crash in prices witnessed in 1983 and 1984 seems unlikely, but a sharp correction, of perhaps 10 to 20 per cent at the end of this year, could be on the cards should a number of detrimental factors come to fruition. The 25 basis points rise in the banks' prime lending rate to 6.75 per cent, announced last Friday, is unlikely to have any immediate effect on prices, or investor sentiment. What it has done is serve as a timely indicator of what is to come. Crosby Securities analysts estimated a 50 basis points rise would result in a three per cent drop in house values. So the 25 basis points rise announced last Friday can only be expected to have minimal, if any, direct impact on prices. The consensus view is that it would probably take a 200 basis points rise to really rock the market. This is the point when Hong Kong would no longer have negative real interest rates and some of the attractiveness of hedging money against high Hong Kong inflation in property will disappear. A 200 basis points rise might sound extreme, given that the 25 basis points rise announced last week was the first increase in interest rates in Hong Kong of any size since 1991. But it may be upon us faster than one might think. Crosby Securities' economists believe Hong Kong could see another 25, or 50, basis points rise this year, followed by a further 100 basis points rise in 1995. This might sound frightening, but it is at the low end of analysts' expectations. Morgan Stanley Asia's property guru Peter Churchouse is more pessimistic, going for another 175 basis points rise by the end of this year, followed by a further 150 basis points rise next year. This would bring mortgage rates up to around 12 per cent in two years time - well in excess of Hong Kong's 8.5 per cent rate of inflation. While the prices of flats are shooting up at 20, 30, 40, 50 or 60 per cent a year, speculating in property will still, more often than not, make sense. But should the price spiral slow down, as Hong Kong's banks and the Government would like it to do, and interest rates progressively rise, some speculators may begin to panic. That situation would be intensified if Governor Chris Patten manages to fulfil his promise this week to take unprecedented measures to increase housing supply. Should Mr Patten succeed, he could jolt the long imbalance between supply and demand that has been keeping prices high. Hong Kong also has to worry about the possibility of Deng Xiaoping's death this year, or China's Most Favoured Nation status not being renewed, either of which could seriously damage business and investor confidence in the territory. Affordability is another worrying factor. When interest rates doubled in Hong Kong between 1987 and 1989, house prices continued to rise. Today, house prices are far less affordable, meaning there is no guarantee that prices will rise this time round. Should all the factors combine simultaneously, Hong Kong house prices could be in trouble. Hong Kong's ever-optimistic estate agents are starting to realise it has been too good, too long, and the golden days could soon be over - but none have yet been brave enough to publicly say so.
