Brakes applied: falling inflation puts hold on interest rate rises in Hong Kong

Sharmaine Lau is chief marketing officer of mReferral Mortgage Brokerage Services. She looks at the direction of interest rates in the United States and the effects on Hong Kong mortgages.

The US Federal Reserve forecasts three interest rate rises this year. What’s your latest take on Hong Kong’s mortgage rates?

According to our data, the average actual home lending rate in Hong Kong stood at 1.99 per cent at the end of December, a record low after it reached 2.12 per cent in December 2013. The Federal Reserve raised rates by 25 basis points in December, but Hong Kong did not follow suit immediately. As a result, the interest-rate spread between the US and Hong Kong widened. At one point, Hibor (H) soared to 0.75 per cent from 0.37 per cent. Borrowers on H-based mortgage plans saw their monthly repayments go up as a result. It is strongly believed that Hong Kong will eventually follow the US and increase the benchmark rates, likely in the second half of the year. On the other hand, Hong Kong’s inflationary pressure has continued to ease. Last December, the inflation rate stood at 2 per cent, and averaged 2.3 per cent for the whole of 2016. That is the fifth consecutive year annual average inflation has inched downwards. Putting inflation and lending figures together, [low] interest rates remain in force at the present time, which has been one of the factors driving housing demand.

How will a rate hike influence the housing market in Hong Kong?

In addition to the rate hike in December, the Federal Reserve has indicated a faster pace of tightening this year. While rate hikes in Hong Kong later this year are widely expected, about 41 per cent of the homeowners we polled in January said even if local lending rates went up by 50 basis points, affordability would remain in an acceptable range to them. About 16 per cent said they could accept a range of 1 per cent to 2 per cent; only 1 per cent said they would accept a rate hike of 2 per cent or more. The findings suggest more than half of the homeowners are confident they have the financial resources to cushion the impact of moderate interest rate increases in the near future.

What other factors are there that might influence property purchases?

Most homeowners surveyed thought that various [government cooling measures] would be the primary factors that might prevent them from making a purchase. Interest rate hikes were secondary. Housing supply was the third most important factor. On housing policy, about 40 per cent expressed hopes that the government would lift or cut the “punitive” stamp duties that apply to home purchases. Over 30 per cent wished lending rules would be relaxed to allow for higher loan-to-value ratios. About 29 per cent wanted easier stress tests for them to pass. In our view, political factors, such as how the [global] economy will fare under US President Donald Trump, the upcoming presidential elections in Germany and France, and concerns over who will be Hong Kong’s next chief executive, might weigh on the city’s housing market. Despite growing political uncertainty, more than half (55 per cent) of the survey respondents said they believed property prices would continue to increase this year. About 36 per cent said prices would remain stable, with the rest saying prices would fall. Only 4 per cent believed home prices would continue to grow in 2016 in a similar survey we carried out a year ago.