The View | Four reasons higher interest rates mean pain in Asian property but no crisis

In a speech last month, Bank of Korea governor Rhee Chang-yong said there was a subtle but important difference between increases in interest rates in South Korea and the United States. “Considering the high proportion of floating rate mortgage loans in Korea, over 60 per cent compared with less than 10 per cent in the US, you can think of our 50 basis-point increase as having the equivalent impact of a 75 basis-point increase by the Fed,” Rhee said.

The central banker put his finger on a key vulnerability in Asia’s residential mortgage markets: the high share of variable-rate loans which fluctuate with changes in rates, as opposed to fixed-term lending, which shields borrowers from the impact of higher rates for some time.

In a report published in May, Fitch Ratings singled out Australia as one of the markets most at risk from tighter monetary policy, in part because of the high share of variable-rate mortgages.

Fitch’s methodology – which classifies fixed-rate loans that expire or reset in the next 24 months as variable-rate mortgages – shows that even fixed-rate borrowers whose loans have a relatively short maturity are vulnerable.

While many Australian borrowers on variable rates switched to cheaper fixed-rate loans during the pandemic-induced recession, a large portion of these mortgages need to be renewed next year. With the Reserve Bank of Australia having raised its policy rate seven times since May, a “mortgage cliff” looms as the average rate on fixed deals of up to three years exceeds 5 per cent, up from 2 per cent in mid-2021.

In Hong Kong, practically all borrowers are on floating rates, with 96 per cent of new mortgages tied to Hibor, the city’s benchmark interbank rate.