Brace for falling home prices as Hong Kong follows US in raising interest rate
Home prices will see downward pressure in next six to nine months before real interest rates return to positive ground by 2018, Colliers says
Hong Kong homebuyers can wave goodbye to negative real interest rates after the US Federal Reserve hiked interest rates by 25 basis points, with analysts expecting more increases to come.
While a small rise in the interest rate will not make mortgage rates in Hong Kong suddenly become unaffordable, home prices will see downward pressure when the city’s interest rate cycle is paving the way to positive from negative, according to property analysts.
Watch: US Fed increases interest rate by 25 basis points
Hong Kong Monetary Authority raised the base rate by 25 basis points to 1 per cent on Thursday morning, the first rise since December last year.
The local de facto central bank increased the base rate, the official interest rate set by the HKMA, after the US increased the interest rate by the same level, the first and only time US interest rates will rise this year.
“The fundamental question for us is when Hong Kong will return to an environment of positive real interest rates,” said Colliers International’s executive director of Asia research and advisory Andrew Haskins.
Hong Kong has benefitted from Asia’s most relaxed monetary conditions since the end of 2008, when the flood of easy money and negative real interest rates bolstered the city’s residential prices by almost 200 per cent during that period, Haskins said.
The real interest rate in Hong Kong currently stands at minus 1.5 per cent, Colliers estimates, using three-month Hong Kong Interbank Offered Rate (Hibor) and the underlying CPI inflation rate of 2.1 per cent. That’s a smaller gap than February and March, when the negative rate was as much as minus 2.3 per cent, Colliers said.
On the assumption that US interest rates only increase gradually and that inflation in Hong Kong stays constant, Colliers does not expect Hong Kong to return to positive real interest rates before early 2018, and more probably until the second quarter of 2018.
“Residential property prices should start to reflect this return six to nine months before it happens,” Haskins said. “The strength of the increase in prices driven by negative real interest rates suggests that there is ample scope for prices to fall as the process is reversed.”
The chance of a substantial downward correction in Hong Kong’s residential property prices remains significant over the medium term, Colliers said.
Besides the interest rate increases, the very stretched affordability combined with an ample pipeline of new apartment supply and the government’s 15 per cent stamp duty on property transactions represent important threats to the recovery in market sentiment, analysts said.
The demand for property investments will be hindered after the rate rise, as it will result in “negative carry,” which compel property prices to fall so that the gross rental yield of 2 to 3 per cent can catch up, said Bocom International’s property analyst Alfred Lau.
He expects home prices will fall 30 per cent next year.
Still, some analysts point out that Hong Kong’s commercial banks have the flexibility to not immediately follow the US in raising their mortgage rates.
A 25 basis point increase in the base rate will only have “psychological impact on the market,” said Knight Frank’s senior director Thomas Lam. “Buyers won’t feel the pain until interest rates increase by 1 to 2 per cent.”
Assuming the US increases rates four times over the next year at 25 basis points each time, it will take another one to two years to reach the 1 to 2 per cent rate level, Lam said.
Closer to home, the Hong Kong government’s November 5 move to raise stamp duty on residential property transactions will have a stronger impact to curb buying demand, Lam said.
While higher rates add pressure on mortgage borrowers and the business sector, a normalisation in the interest rate will benefit Hong Kong’s economic structure, said the Hong Kong Monetary Authority’s chief executive Norman Chan, during a press briefing today.
“Interest rate is only one factor that affects the property market,” Chan said. “There are other reasons for people to decide when to buy or sell their properties.”
CLSA’s head of China and Hong Kong strategy Francis Cheung said there was likely to be a 7 per cent correction on Hong Kong property next year - although it could be higher.
The combination of a high transaction tax of 30 per cent on mainlanders, and three interest rate hikes next year, would dry up Chinese demand in Hong Kong, he said.
“This interest rate hike will have a very significant impact on the Hong Kong property market,” Cheung said during a 2017 Outlook media conference on Thursday.
Meanwhile, some property buyers are exploring mortgage products with lock-in rates that lower the risk of further interest-rate increases.
“We have received numerous calls from clients asking whether they should shift to prime-based mortgage from Hibor-based mortgage,” said Centaline Mortgage Broker’s managing director Ivy Wong Mei-fung.
Hong Kong one-month interbank borrowing rates jumped to an eight-year high of 0.66 per cent on Thursday following the US Federal Reserve’s rate increase. That means a Hibor-based mortgage is priced at 2.36 per cent, higher than a prime-based mortgage at 2.15 per cent.
As many as 94.8 per cent of the city’s new mortgage loans were priced with reference to Hibor as of October, according to the Hong Kong Monetary Authority.
Currently, owners are being charged at 3.1 per cent below prime, stands at 5.25 per cent.
Home owners require to pay an extra HK$124 per month for every HK$1 million mortgage loan at a 25-year term for every 25 basis point rise in interest rates.
With reporting by Julia Hollingsworth.