House prices in Hong Kong, the world’s most expensive real-estate market, could cool next year if the US Federal Reserve delivers the rate hikes it has projected, the IMF said.
The outlook comes as Hong Kong’s red-hot property sector shows few signs of a slowdown with price gains of 11 percent this year, even after the government pushed through new taxes and mortgage curbs.
The Fed could slow that momentum, IMF mission chief for Hong Kong Sonali Jain-Chandra said.
“If the Federal Reserve’s plans to increase interest rates during the next year materialize, as expected, we should expect a moderate slowdown of house prices in Hong Kong,” Jain-Chandra said in e-mailed remarks.
Fed officials are scheduled to meet on Dec. 12 to 13 in Washington, with economists forecasting that they are to raise the benchmark interest rate. The US central bank has lifted rates just four times in two years and put its US$4.5 trillion balance sheet on a very gradual path of slimming down, but further tightening is expected next year.
Because Hong Kong’s currency is pegged to the US dollar, it effectively imports US monetary policy. Higher borrowing costs in the US and elsewhere in the world would increase Hong Kong’s debt burden and suck capital away from the finance hub.
However, authorities have tools to respond.
If there was a housing slump, very tight macro-prudential policies and punitive stamp-duty taxes could be reversed, Jain-Chandra said.
“If a large and disorderly correction were to happen, the authorities could reverse their current policies to support the housing market,” she said.
US economic growth could cushion the effect of any tightening by the Fed or other central banks around the world, Jain-Chandra said, adding that during past periods of Fed rate hikes, Hong Kong’s growth and exports rose.
Releasing its annual assessment of the former British colony on Wednesday, the IMF said that although faster global growth and ongoing reforms in China are lifting Hong Kong’s economy, but “overall risks are still tilted to the downside.”
It described Hong Kong’s property market as “booming and overvalued.”
Buyers continue to set new records for residential and commercial properties, putting the territory in bubble-risk territory. Mass market home prices are tipped to rise between 8 percent and 10 percent next year, property consultancy Colliers International Group Inc said.
Real-estate consultant Knight Frank LLP expects prices of such homes to climb 5 percent next year, while luxury housing advances 8 percent.
Because a significant portion of new mortgages are on floating rates and indexed to the benchmark HIBOR, borrowers are vulnerable to interest rate hikes, the IMF’s report said.
Interest rates for mortgages linked to HIBOR have been rising since May after the Hong Kong Monetary Authority raised the capital that banks have to set aside to cover new housing loans.
“A disorderly housing price correction could trigger an adverse feedback loop between house prices, debt servicing ability and lower consumption, which would result in weakening growth leading to second round effects on banks’ balance sheets,” the IMF said in its report.
To deflate the housing boom, authorities would need to speed up the supply of new housing stock by tackling hurdles that are blocking the release of land for development. Continued usage of macro-prudential measures also needs to be part of the policy response.
“One of our main policy recommendations is to increase land supply for new developments,” Jain-Chandra said.
Both Moody’s Investors Service and S&P downgraded Hong Kong’s credit rating this year on earlier cuts to China’s status, citing linkages between the two economies.
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