Hongkongers will feel the squeeze as mortgage rates gain momentum
Homeowners in Hong Kong, who use 60 per cent of their monthly income towards mortgage repayments, will see that figure rise to 70 per cent by the end of the year as banks raise their lending rates to match the Fed rates
The monthly mortgage repayment of homeowners in Hong Kong is expected to rise to 70 per cent of their monthly income by the end of this year – the highest level in nearly two decades – as mortgage rates kick upwards and home prices show no signs of abating, according to mReferral Mortgage Brokerage Services.
At present, the affordability ratio – monthly mortgage instalment to median salary income of families living in private flats – was 60 per cent, indicating that Hong Kong home prices were hardly affordable, said Sharmaine Lau Yuen-yuen, chief marketing officer at mReferral Mortgage Brokerage Services.
“As salaries are not likely to keep up with the growth in housing prices, the ratio could even approach 70 per cent by the end of the year,” she said.
The last time the ratio reached 70 per cent was back in July 1998.
Lau said that the price-to-income ratio, which is a good measure for buyers, showed that housing affordability had reached “alarming” levels for those trying to climb on the property ladder.
The ratio compares the official median income of families living in private flats in the first quarter this year – HK$39,600 to the mortgage repayment for a 500 square feet flat with a mortgage of 70 per cent of the flat’s value and repayment period of 20 years, which came in at HK$23,720 or nearly 60 per cent of monthly income.
Housing prices of used homes in Hong Kong rose for 25 straight months up to April, accumulating a price growth of 38.5 per cent, according to figures from the Rating and Valuation Department.
Prices of used homes last month stood at HK$13,216 per sq ft on average, up 14.7 per cent year on year, according to Land Registry records.
“Those preparing to buy flats, or would like to use mortgages of a high loan-to-value ratio, should be cautious, since the mortgage rate will definitely trend upwards,” Lau said.
For every quarter-point increase in the mortgage rate, the yearly repayment will increase by HK$6,096 for a HK$4 million loan with a 30 year tenor, while the total interest cost would rise by HK$182,880, according to the brokerage.
The average loan size of residential mortgages was HK$4.3 million in April, according to the Hong Kong Monetary Authority.
Hong Kong’s mortgage rates are set in two ways, namely Hibor, or Hong Kong interbank offered rate, plus a percentage (1.24 per cent currently), or prime rate minus a percentage (3 per cent currently). The prime rate varies from bank to bank.
The recent uptrend in Hibor, which rose to a 10-year high of about 1.58 per cent on Wednesday, has led HSBC to stop offering fixed-rate mortgage plans as it comes under cost pressure, as homebuyers have been recently seen shifting their preferences from floating rates to fixed rates.
She said cost pressures and capital outflows will cause local banks to “definitely” increase the prime rate, which has remained unchanged for 12 years, in the second half of the year.
OCBC Wing Hang has already moved from prime-3.1 per cent to prime-3 per cent, which in effect means that the bank’s mortgage rates have gone up.
The Hong Kong Monetary Authority raised the city’s base lending rate by 25 basis points on Thursday morning, in lockstep with the US Federal Reserve’s decision, to maintain stability in the local currency.
The gap in the cost of funds between the US and Hong Kong, which could increase to 1.75 per cent after Thursday’s rise, has led to capital outflows, causing Hong Kong’s currency rate to deteriorate for months, prompting multiple interventions from the HKMA to defend the currency peg.
As for the effect on housing prices, Raymond Cheng, a property analyst at CGS-CIMB Securities, said the interest rate increases might “ease the price hike”, with the extent “quite depending on comments from the Federal Reserve and liquidity of Hong Kong’s banking system”.
“Anyway, any rate hike will have a negative impact on the property market but [it is] just a matter of how serious it can be.”