Challenging times: short-term pain but Hong Kong’s property market’s long-term outlook is sound

Hong Kong’s luxury and mass residential home prices are expected to weaken, but will not be seriously affected in the long term despite an end to the era of cheap money, analysts and property developers say.

Last week, the United States Federal Reserve raised the cost of borrowing by 25 basis points, its second hike since December 2015, and three more rate rises are expected in 2017.

Hong Kong’s financial markets had factored in a rate rise of 25 basis points for some time and the Fed’s action last week came within those expectations.

Experts expect property prices in Hong Kong to drop marginally in the coming months, hit by last November’s new stamp duty.

However, solid residential demand from mainland and Hong Kong residents will continue to prop up the property market, analysts say.

Nonetheless, Bank of America Merrill Lynch predicts that Hong Kong home prices will fall 5 per cent next year. The city’s secondary property prices are forecast to slump 20 per cent in the next three years, ending a 13-year rise from 2003 to 2016.

The Centa-City Leading Index, an indicator of secondary private residential property prices, rose to 144.47 during the week of November 21-27 – up 0.27 per cent from a week earlier, but slightly lower than the all-time peak of 146.92 recorded on September 13.

Sharmaine Lau, chief economic analyst at mReferral Mortgage Brokerage, has a different take on the property market. She says that due to the yuan’s depreciation, capital will continue to flow into Hong Kong’s property market and, therefore, there is still room for a 5 per cent price appreciation next year, despite thinning sales volume.

“Banks will continue to offer low-interest rate mortgage products and other products, such as fixed-rate plans, to compete for customers next year,” Lau says.

Justin Chiu, executive director of CK Property, does not expect the US to accelerate raising interest rates. He expects rates to rise once or twice next year, and for the impact on Hong Kong property’s sector to be minimal.

Norman Chan, chief executive of the Hong Kong Monetary Authority, says the pace of interest rate normalisation in the US will rely on inflation and other economic factors.

So how will Hong Kong banks react to the US interest rate hike this time?

Victor Lui, deputy managing director of Sun Hung Kai Properties, says Hong Kong banks have ample liquidity.

“Banks remain very aggressive in the mortgage lending business, meaning they are confident in the housing market and strong liquidity,” Lui says.

Joseph Tsang, managing director of JLL in Hong Kong, says that there is a concern that last week’s move by the Fed is the start of an upward interest rate cycle, and the indications are that the US would raise interest rates three times next year.

If this happens the Hong Kong interest rates may climb to 3 per cent, which would be bad news for homebuyers. Tsang says this would cool the investment demand for properties in Hong Kong.

“Investment properties with a yield of 3 per cent would no longer be attractive, but this will have no impact on end-users’ demand,” he says. Tsang expects the interest rate hike may put superluxury residential prices under pressure, but mass residential prices will stay firm as the asking prices of new projects are already close to development cost.

Chan says that if the US lifts rates again in the first quarter of the new year, the spread between US and Hong Kong rates will widen. And Hong Kong will possibly see capital outflow as a result. However, Chan points out that Hibor rates increased notably well before the last US rate hike which was a result of a drop in liquidity in the banking system and a rise in lending costs for banks.

The International Monetary Fund (IMF) has warned in its annual assessment that Hong Kong’s economy could face challenges due to rising interest rates next year. The IMF identified three main risks – rising interest rates and potential global market volatility, China-linked stress, and a possible downturn in the property market. With the Fed expected to continue raising interest rates next year, the higher borrowing costs will automatically flow through to Hong Kong, which effectively imports US monetary policy because of the dollar peg to the greenback.

“A steeper-than-expected US rate cycle or tightening of global financial conditions may have a bigger-than-usual adverse impact against a backdrop of high household debt with floating-rate mortgages,” the IMF said in its report, known as the Article IV Consultation.