Love or hate it, a higher mortgage rate will help to normalise Hong Kong’s housing market

Higher mortgage rates were inevitable and they will help bring back normality to the property market

PUBLISHED : Wednesday, 29 November, 2017, 6:48pm
UPDATED : Wednesday, 29 November, 2017, 10:48pm

Homebuyers hit as Hibor jumps to 9-year high - Business, November 29

Some people will always complain that a glass is half empty rather than be glad that it is half full. Here at last, comes the remedy to the high home prices about which everyone has complained for years, and what are we told instead?

Homebuyers hit.

I shall grant you that people who have just recently bought into residential property market will not feel happy about the rising trend of interest rates, and I am sorry for the minority among them who are not speculators.

But it is still the only way that home prices can come down, and many other people will be happy when they finally do so.

We shall leave to their dreamworld (and the letters page) those hopefuls who believe that the government has only to legislate lower prices and all will be well again.

My first chart here of the Centaline Property Agency’s affordability index shows you the power of interest rates. It works on the assumption that the real price of housing, as homebuyers see it, is the average monthly mortgage payment for an average flat of small to medium size.

This in turn is determined by a number of factors including the headline price of the flat, the down payment, the mortgage term and the mortgage interest rate. The chart shows a 20-year history of the average mortgage payment as a percentage of average household income.

Notice that in mid-1997, it peaked at 113 per cent, which is clearly unsustainable and was not sustained. It is now at only half that level.

This is curious, given that headline prices of small-to-medium sized flats doubled over the same period. The affordability index stands at only a quarter of the level at where you might expect it to stand.

But it is not so curious when you realise that mortgage interest rates now stand at only about a quarter of where they stood in 1997. They are far and away the most important determinant of whether a household can afford a flat.

Read: Demand for welfare housing in Hong Kong keeps rising … and we should beware

And, as the second chart shows you, even with a big jump on Tuesday, the 3-month Hong Kong dollar interbank offered rate (Hibor) is still below the level of its closely linked US dollar equivalent.

This linkage will always be close, because of our peg to the US dollar. Heaven help our property market should we ever choose to delink. It is important because more than 90 per cent of the rates for new mortgages are at present based on Hibor

There were some attempts yesterday to explain away Tuesday’s big Hibor jump, as a local illiquidity anomaly resulting from a peg-related decline in commercial bank balances held with the Hong Kong Monetary Authority.

It won’t wash. The HKMA made up for it with other measures to restore liquidity and the monetary base remained virtually unchanged. This is the long expected and worldwide rise in interest rates coming through at last, and we have further to go to catch up with it, leave alone how much further it then takes us up.

Rising interest rates will not be warmly welcomed, but they were inevitable sooner or later, and they will bring normality back to Hong Kong’s property market.