Potential rate cut pause, geopolitical tensions may cloud Hong Kong property recovery

Hongkonger Katie Chan was hoping to buy a flat to live in, and although the 37-year-old accountant was in no rush, the potential longer pause in interest rate cuts could delay her decision. For Chan, the ideal mortgage would be if the one-month Hong Kong interbank offered rate (Hibor) fell below 1.95 per cent, but this year the key driver for local mortgage costs and corporate borrowing rates had only dropped to as low as 2.02 per cent, according to data tracked by the Hong Kong Association of Banks. “I may only make the purchase next year and the interest rate may well be lower at that time,” she said. Chan’s plans may not be significantly affected by a slower reduction in interest rates, but the city’s property market could see some impact, albeit a limited one, according to analysts. In fact, a general sentiment among homebuyers to adopt a wait-and-see approach amid rising geopolitical uncertainties could dampen the recovery in the sector. On Thursday, the US Federal Reserve kept its target rate in the range of 3.5 per cent to 3.75 per cent, after the second meeting of the Federal Open Market Committee (FOMC) this year. Following the decision, the Hong Kong Monetary Authority warned of uncertain direction in US monetary policy, adding that the “public should carefully manage interest rate risks when making decisions about property purchase, investment or borrowing”. Hong Kong’s monetary policy moves in lockstep with the US to maintain the local currency’s peg to the US dollar. The pause in interest rate cuts and the potential worst-case scenario of monetary policy going in the opposite direction to curb inflation owing to surging oil prices comes at a time of renewed optimism in Hong Kong’s residential property market after three years of slumping prices. The Fed’s pause was “within market expectations”, said Kathy Chan, equity analyst at US financial services firm Morningstar. However, the market was now expecting a single cut this year instead of two, she said. A rate hike could also be possible, although its probability remained low, she added. Fewer rate cuts this year could have a “limited impact” on Hong Kong recovery, Chan said. “Our base case does not assume a prolonged war, and we expect concerns on potential rate hikes should subside once geopolitical tensions ease,” she said. “Residential buying sentiment may soften given the reduced rate cut outlook, but robust rental demand continues to support the sector. If rental yields rise more meaningfully above mortgage rates, this yield gap should underpin end user and investor demand.” On the other hand, investment-driven segments would be more vulnerable to a longer pause in rate cuts as “financing costs and yield expectations play a larger role”, said Cathie Chung, senior director of research at JLL in Hong Kong. Beyond individual investors, earnings of Hong Kong developers such as New World Development and Henderson Land Development were the “most sensitive to rate movements”, said Karl Chan, head of Hong Kong property research at JPMorgan Chase. The US investment bank was forecasting “a rate pause over the next four quarters, not a rate hike”, Chan said. “In our view, the sector can tolerate a rate pause as homebuyers are still enjoying a mildly positive carry.” Should an interest rate hike materialise, Chan noted that it would not necessarily cause share prices or home prices to drop. In previous periods of tighter monetary policy, such as 2004-2006 and 2016-2018, Hong Kong home prices rose 13 per cent and 20 per cent, respectively. This growth came alongside gains in the city’s stock market. “Theoretically, a rate hike is negative for the sector,” Chan said. “However, rate movements alone do not totally dictate both share price and home price performances. Rates aside, other sector fundamentals remain solid and we stay positive.” This view is shared by Ricacorp Properties, one of Hong Kong’s largest property agencies, which said interest rates were “one of several factors” influencing the property market. “Looking at the current situation in Hong Kong, the economy is improving, the unemployment rate has edged down slightly again, and transaction volumes in both the primary and secondary markets remain robust – all of which point to strong underlying home-buying demand,” said Derek Chan, Ricacorp’s head of research. Given the continued turmoil over the Iran war, Chan said Hong Kong was seen as a city with “considerable stability and safety across political, economic and livelihood dimensions, making it a highly attractive destination for global capital and investors”. Likewise, the market still anticipated that the overall direction of future rate cuts remained unchanged. “As such, the impact on Hong Kong’s property market is expected to be limited,” Chan said.

Potential rate cut pause, geopolitical tensions may cloud Hong Kong property recovery

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}A wait-and-see approach by Hong Kong homebuyers amid rising geopolitical uncertainties could dampen recovery in the sector

A wait-and-see approach by Hong Kong homebuyers amid rising geopolitical uncertainties could dampen recovery in the sector