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Hong Kong economy

Tougher times ahead for Hong Kong homeowners as interest rate increases loom, finance chief says

Speaking at Legislative Council, Paul Chan sees higher hurdles to affordability in red-hot property market

PUBLISHED : Monday, 08 January, 2018, 4:05pm
UPDATED : Monday, 08 January, 2018, 10:32pm

Hong Kong homeowners may have a tough time keeping up with mortgage repayments this year as local banks are set to increase their prime rates to follow interest rate moves in the US, the city’s financial secretary said on Monday.

Paul Chan Mo-po offered the gloomy forecast as America raised the rate for the fifth time since the end of 2015, to anywhere between 1.25 per cent and 1.50 per cent, in December. At least three more upward adjustments are expected this year.

“Under the peg linking the city’s currency to the US dollar, it is inevitable that Hong Kong will follow suit this year to increase interest rates,” he told lawmakers at a Legislative Council finance panel meeting. If introduced this year, a rate increase would be the first in the city since 2008.

Chan said Hong Kong’s homeowners faced a worrying future as the expected interest rate rises from their current low levels would impose a heavy burden in the face of sky-high property prices.

Soaring property prices have already exceeded the affordability of most ordinary citizens
Finance minister Paul Chan

“As a result of the surging market over the past several years, overall flat prices last November exceeded the peak of 1997 by 101 per cent,” he said. “Soaring property prices have already exceeded the affordability of most ordinary citizens. Their burden will be heavier if there are interest rate increases.

“This is a worrying trend.”

That was despite property prices slowing to a growth of 0.5 per cent in the third quarter last year, down from a 1.5 per cent rise in the first half of the year, with only 4,400 transactions.

However, in November, flat prices rebounded by 1.1 per cent, with 5,400 transactions.

For a small flat on Hong Kong Island, the average price per square foot was more than HK$15,000 (US$1,900), meaning a 430 sq ft flat would cost at least HK$6.45 million (US$825,000).

Chan added that, in the third quarter of last year, home purchase affordability – the ratio of mortgage payment to median household income – worsened to around 68 per cent. That figure was significantly higher than the long-term average of 45 per cent between 1997 and 2016.

“Should interest rates rise by three percentage points to a more normal level, the ratio would soar to 88 per cent,” he said.

To mitigate the problem, Chan advised, the government would boost housing supply in the next few years, including 24,300 private residential flats this year, up 35 per cent from the original target of 18,000.

Civic Party lawmaker Dennis Kwok asked whether the government could help young people cope with the large down payment they must dole out to ascend the housing ladder, an expense that is at least 40 per cent of the property price.

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Chan said they needed to be prudent.

“Property prices now are at a very high level and in the near future interest rates will also go up. If we provide help for young people to buy homes easily and the market adjusts, it would be a blow to them. This is our concern.”