US interest rate rise may have dire consequences for HK property market
Every indicator is screaming that Hong Kong property is too pricey so a potential interest rate increase by the US Federal Reserve could have dire consequences.
Analysts estimated an increase could result in Hong Kong home prices falling 5 per cent to 10 per cent this year.
Morgan Stanley expects residential prices to decline 5 per cent from current levels by December and remain flat next year.
"This is because of slowing economic growth and inflation, plus potential interest rate [rises]," analyst Praveen Choudhary of Morgan Stanley wrote in the report.
"Market sentiment in the primary market has deteriorated mildly with slower sell-through rate. Secondary volume has dried up too.
"Assuming the United States Federal Reserve rates rise 100 basis points in the next 12 months, and inflation declines to 2.5 per cent, we could see positive real rates."
Buoyed by low interest rates and excess liquidity, Hong Kong home prices have surged 360 per cent in the past 12 years to record highs. At present, most banks offer home loans at 2.7 percentage points below prime, which stands at 5 to 5.25 per cent.
It means the real mortgage rate is at a historical low of 2.3 per cent, which helps the affordability ratio drop to the current 46.4 per cent from 93.2 per cent in 1997 when the mortgage rate was about 11 per cent.
The ratio is a widely used measure of housing affordability and is calculated by dividing the average market price of a standard home by the average or median annual household income.
Tristan Zhuo, a senior economist at Bank of China (Hong Kong), said ultra-low interest rates had been the single most important factor in driving property prices ever higher.
"It is thus likely that the peak of property prices may coincide with a Federal Reserve interest rate rise," he said, adding mortgage rates would eventually go up following Fed rate rises.
However, given that the Fed has been taking pains to telegraph a very gradual pace of future rate increases, mortgage rates are likely to remain historically low at least in the short term.
Buggle Lau Ka-fai, the chief analyst at Midland Realty, said he expected home prices could face downward adjustment pressure only if interest rates increased by more than one percentage point.
"Home prices could tumble 10 per cent in the worst scenario on a combination of a steep rise in interest rates and higher unemployment rates," Lau said.
The last interest rate uptrend cycle was in June 2004 to June 2006 where home prices shot up 14 per cent despite the lending rate only increasing by 4.25 percentage points. But the rise came after home prices plunged nearly 70 per cent from the peak level in October 1997.
Cusson Leung, the head of conglomerates and property research at JP Morgan, said interest rates might not be the major factor to affect property market and property stocks.
"The outlook of Hong Kong's economy is a big concern," he said.
Nixon Chan, an executive director and head of retail banking and wealth management with Hang Seng Bank, said he expected mortgage rates to remain stable.
"Any interest rate rise will inevitably affect home buyers' repayment ability," he said.