The US Federal Reserve is likely to succeed in reining in home prices where Hong Kong’s government has failed and property investors in one of the world’s most expensive real-estate markets are already bracing for a slump.
The Fed is expected to raise interest rates by June at the earliest, its first monetary tightening measure since 2006. If history is anything to go by, Hong Kong’s monthly residential real-estate sales could be cut by one-third when that happens.
Some industry experts forecast home prices will fall by more than one-third by the end of next year, clouding the prospects of major developers CK Hutchison Holdings Ltd (長和集團) and Sun Hung Kai Properties Ltd (新鴻基地產).
An increase in US rates would also trigger a rise in Hong Kong, because the local currency is pegged to the US dollar, paving the way for monthly mortgage repayments to jump nearly one-fifth by the end of next year in a territory where household debt, by some measures, is at a record high.
“Don’t buy. You have to wait for two years,” said Jacinto Tong (湯文亮), chief executive of property firm Gale Well Group (紀惠集團), which has investments of more than HK$30 billion (US$3.9 billion).
Hong Kong property prices have surged by more than 130 percent since 2008 when the Fed adopted its near-zero rate policy, due to low interest rates and a supply shortage, shrugging off a series of cooling measures and posing policy challenges to the government of embattled Hong Kong Chief Executive Leung Chun-ying (梁振英).
In 2005, a mortgage rate hike drove monthly sales of private homes to fall by about three-quarters in eight months, and many fear a repeat performance when the Fed hikes rates.
A 50 basis point hike in mortgage rates by the end of this year would increase monthly repayments on a 20-year mortgage by 4.7 percent, Barclays property analyst Paul Louie said, using the latest official median Fed rate target forecasts.
Holding all else constant, Hong Kong homeowners could face a jump in monthly mortgage payments by the end of next year and 2017 of 17 percent and 30 percent respectively. The household debt to GDP ratio is already at a record high 64 percent.
“Without the visibility of where interest rates may peak out, we believe some home buyers are likely to take a wait-and-see attitude,” said Louie, who is expecting a 15 percent drop in home prices this year and a further 15 percent fall next year.
“We recommend investors reduce their weighting to Hong Kong property stocks,” he added.
For many homeowners, a rate hike means leaner times in a territory where the average home price is 17 times more than household income, according to consultancy Demographia.
Hong Kong’s private new home transactions jumped to a record high last year, with 80 percent of purchasers first-time buyers — a group analysts say would be hardest hit by a mortgage hike.
For Brian Cheung, a 28-year-old nurse in Hong Kong who just bought a HK$7.2 million apartment with his girlfriend, a higher mortgage means more stringent discretionary spending.
Cheung and his girlfriend spend one-quarter of their combined monthly salaries on their mortgage, and a rate hike could increase that HK$15,000 payment by about one-third.
“It’s going to be a huge burden for me,” he said. “If it happens, the extra will definitely come from our living expenses.”
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