6 July 2017 - The United States interest rates set by the Federal Reserve frequently impact markets across the globe. Since the 2008 financial crisis, the Federal Reserve has very reservedly increased interest rates. Similarly, Hong Kong S.A.R has had low interest rates since the 2008 global financial crisis. The cheap cost of borrowing along with strong mainland capital inflows has allowed Hong Kong’s property price index to continuously set new highs.
How US Interest Rates Will Impact the Hong Kong Market
In early 2017, the Fed announced its intention to not only raise interest rates, but to do so 3 times in 2017, with additional increases expected in 2018 and 2019. Since the beginning of the year, interest rates have already increased by 50 basis points, once in March and the second time in June. As the year started with a 0.75% interest rate, the current rate of 1.25% represents a 66% increase. Current expectations are that 2017 will end with a median fed-funds rate of 1.4%. That’s an 86.6% increase in the cost of borrowing year-over-year.
As Hong Kong’s currency is pegged to the U.S. dollar, the Hong Kong Monetary Authority (HKMA) tracked the increase with a corresponding 25 basis point increase of its own. The four largest commercial banks in Hong Kong did not track the move, but still raised Hibor-linked mortgage rates by 10 basis points to 1.4 percent in May 2016.
In late May, the HKMA introduced new regulations that require banks to modify their assessment of credit worthiness with a heavier weighting of risk. Simultaneously, the HKMA is cutting the amount of allowable loans on residential and commercial properties as well as loans towards property developers.
If the HKMA continues tracking the subsequent expected 8-9 rate U.S. interest rate hikes through 2019, the higher cost of borrowing is likely to cause capital outflows from Hong Kong. The reduction of liquidity in the market as Hong Kong’s cost of borrowing rises above a negative real interest rate is likely to start creating tangible downward pressures on the property market. However, David Ji of Knight Frank believes that impact on property prices will be minimal unless interest rates increase by more than 200 basis points.
Despite the interest rate hike, Centaline Property Research Department announced that the Centa-City Leading Index (CCL) had once again reached a new high during the week of June 5th. This marked the 16th time the CCL reached a record high in as many weeks, and established another record in doing so: the most consecutive record breaking weeks since 1997.
For would-be homebuyers, a careful eye should be kept on interest rates as current expected increases will add to individual risk exposure. Mortgage lending banks in Hong Kong are very likely to raise rates in the future to minimize capital outflows from an interest rate differential between the HKD and USD.
However, as has been mentioned in our recent article comparing current property market conditions to those seen in 1997, interest rates would need to increase significantly before any discernable effect would be seen in local property prices, since the first stage of a cyclical upturn in rates reflects improving economic conditions. Thus it may be several years before interest rates negatively impact property values, and a lot can happen during that time.
