Latest rate rise from Fed spells caution for those home hunting

It’s not a matter of if but when Hong Kong banks succumb to pressure and start following US monetary policy, making those with mortgages pay more

PUBLISHED : Saturday, 16 June, 2018, 5:08am
UPDATED : Saturday, 16 June, 2018, 5:13am

The interest rate upcycle is around the corner for Hong Kong’s mortgage holders. Those planning to enter the heated property market must be especially careful about their ability to sustain commitments through this period.

As expected, the United States Federal Reserve raised its benchmark interest rate by 25 basis points to 2 per cent. This was duly followed by the Hong Kong Monetary Authority (HKMA), which raised the base lending rate by the same number of points to 2.25 per cent.

Fed officials signalled two more rises to come before the end of the year. Since 2016, the Fed has raised rates seven times but, thanks to ample liquidity, local banks didn’t have to follow the United States every step of the way despite the US-HK dollar peg.

However, conditions today are different. The short-term three-month lending rate between banks called Hibor has doubled to 2 per cent since the end of last year. One-month Hibor has hit 1.60 per cent, the highest level since 2008.

Since the vast majority of floating bank mortgage rates are tied to Hibor, the direction of local interest rates is clear. It’s not a matter of if but when local banks succumb to pressure and start following US monetary policy.

As borrowing rates have been at a historic low for over a decade, many first-time flat owners will find themselves in unfamiliar territory once their interest payments start going up.

Since the start of the year, the property and stock markets have been rosy, but risks are building. Actions taken by the HKMA since April to defend the Hong Kong dollar have tightened liquidity.

A flood of initial public offerings, including the upcoming mega IPO of mainland smartphone maker Xiaomi, means investors will be borrowing heavily and putting upwards pressure on Hibor.

Why China’s central bank is taking a different path from the Fed on interest rates

Meanwhile, the mainland economy may be cooling as the central government’s efforts at deleveraging are starting to bite. Retail sales rose by just 8.5 per cent year on year in May, its slowest in 15 years.

Fixed-asset investment – the single biggest driver of the Chinese economy – increased by 6.1 per cent year on year during the five months to May, the slowest rise of any period since records began 20 years ago.

The data is softer than expected, though China may still make its 6.5 per cent growth target. However, the latest news clouds the economic outlook and adds more uncertainty in Hong Kong. On top of it all, US President Donald Trump is threatening a trade war.

Hong Kong is at the mercy of outside economic forces over which it has no control. And domestically, no matter how fast interest rates move, the housing shortage remains a great challenge.

Long-suffering savers will enjoy the rate increases. But for everyone else, the time for caution is now.