Why rising interest rates are bad news for Hong Kong’s housing market
- Hong Kong’s banks, which have refrained from raising mortgage rates so far, could be forced to lift them to keep up with the Fed increases
- Property prices may fall once capital outflows accelerate as investors take advantage of higher rates in the US
Hong Kong’s homebuyers should be mindful of the impact of the upward cycle of interest rates in the US as local banks are likely to follow suit, thus reducing the appeal of the city’s property assets, analysts said.
“Those who are considering buying a home need to think clearly, [as] the market has actually started [to see] a cycle of interest rate hikes,” said Keith Chan, head of research in Hong Kong at Cushman and Wakefield.
If US interest rates continue to rise as expected, the city could see capital outflows, he said, adding that under such circumstances Hong Kong banks could keep up with the faster pace of interest-rate increases.
While Hong Kong banks have held back from raising mortgage rates, the possibility of higher interest rates have been looming since the Federal Reserve raised its benchmark borrowing cost by 25 basis points in March and 50 basis points in May to tame the fastest inflation in four decades. The market expects the Fed to raise by 75 basis points this week in what would be the most aggressive tightening since 1994.
The US central bank has flagged 10 increases through the end of 2023. The Hong Kong Monetary Authority increases its base rate in lockstep under its linked exchange rate system to preserve the local dollar’s peg to the US currency.
Last week, the HKMA said global capital flows and geopolitical risks were Hong Kong’s biggest challenges for the next few years. HKMA chief executive Eddie Yue Wai-man warned that the cost of borrowing money will continue to rise, which will lead to more capital leaving the city.
The Fed’s rate increase has also seen capital outflow from Hong Kong, with the HKMA intervening seven times since May – selling US$4.54 billion and buying HK$35.63 billion – to maintain the currency peg.
“This is actually a signal that capital in the market will actually begin to tighten,” said Chan. “Higher price levels will lead to rate hikes, which will be a negative factor for real estate.”
Other market observers concurred.
“Rising US interest rates will drive capital outflows to the US,” said Sam Chi-yung, chief strategist at Patrons Securities, adding the city’s property prices may fall once capital flight accelerates as investors take advantage of higher US rates and stand aside for potential policy changes after incoming Chief Executive John Lee Ka-chiu takes over the reins next month.
Sam said that investors were always on the hunt for better yielding assets. Ten-year US Treasuries yielded 3.3 per cent on Tuesday, while the yield on office, retail and small residential properties in Hong Kong stood at 2.4 per cent in April, according to data published by the Rating and Valuation Department.
“If [investors] simply buy a 10-year US bond, the yield is better than property. I think investors will prefer it,” Sam said. As Hong Kong real estate is sensitive to interest rates, any increase would be detrimental because of the associated rise in servicing mortgage payments, he added.
Some analysts, however, played down the impact of rising interest rates.
Nelson Wong, head of research at JLL in Greater China, said that “a rising rate environment having an adverse effect on real estate values is a fairly broad-brush comment”.
Wong noted that investors with diversified investments were unlikely to withdraw entirely from Hong Kong. Meanwhile, real estate investments were long-term by nature, so any major shift in allocation of funds does not necessarily correspond to just one event or reason, he added.