Rising Interest Rates Raise Uncertainties for Hong Kong's Property Market
Rising interest rates may help to cool off prices in the world's least affordable housing market, something the government's administrative measures have had little success in doing.
Housing prices in Hong Kong have risen to record levels in recent months, defying efforts by the government to stem the tide of rising costs.
But rising interest rates, sparked by recent moves by the U.S. Federal Reserve, may succeed where taxes and other government dampening measures have failed. And some experts are warning that if this happens, it might not be pretty.
"Normalization of U.S. interest rates will eventually raise the mortgage burden of Hong Kong borrowers, posing risks" to the city's export-driven economy and housing market, said Kevin Lam, HSBC's Greater China economist, in a research note.
In Hong Kong, home resale prices rose on average 21% in May from a year earlier, exceeding the previous peak recorded a month earlier, according to the latest data available from Hong Kong's Rating and Valuation Department.
The housing market has been mostly rising since the second half of 2016 after a small dip, as regulatory cooling measures seemed to only have a short-lived impact.
"Home prices have nearly tripled over the last decade and relative to incomes, are close to the highest on record," said Chang Liu, China economist at Capital Economics.
One of the newest residential projects put out for sale was Park Yoho Genova, where the asking price of a 721-square-foot apartment is HKD$10.4 million, or HKD$14,429 ($1,850) a square foot. The average sales price of a residential property transacted in Manhattan in the first quarter was $1,778 a square foot, according to a report from Douglas Elliman.
While these prices are comparable, housing is considered much less affordable in Hong Kong because incomes are so much lower. Indeed, for seven years Hong Kong has been ranked the least affordable city out of the 406 surveyed by Demographia, a think tank based in Belleville, Il.
Hong Kong's housing crisis is one of the biggest causes of resentment in the region 20 years after its handover to Chinese rule. Housing prices remain high due to the city's large population, land shortages, speculation and ample money supply.
Hong Kong also attracts demand from wealthy customers globally, and in recent years its housing prices have been driven up by an influx of newcomers from mainland China.
To head off damaging property bubbles, the government implemented property cooling measures intermittently since 2009, including stamp duties -- which are essentially sales taxes -- and curbs on bank lending. The latest attempt was in May -- the Hong Kong Monetary Authority ordered banks to tighten credit assessments and cuts to the loan amounts banks can extend for properties.
But many experts predict these new measures will be as unsuccessful as similar efforts in the past. Buyers in Hong Kong already face some of the most prohibitive rules about home purchases, including a regulation from the central bank requiring home buyers to fork out a minimum down payment of at least 40%. Banks also have to set aside more money as reserves against bad loans.
Stamp duties have been raised to at least 15% to 30% for individuals and companies purchasing a residence, with some exceptions for permanent Hong Kong residents buying their first home.
But over the years such property cooling measures only had a short term effect. They haven't been as effective as those in Singapore or Canada because of a chronic mismatch between demand and supply and the exploitation of loopholes in these measures, analysts said.
For instance, cash-flushed property developers are helping customers skirt the central bank's minimum down payment measures by offering buyers credit so that they can make the down payment on new launches.
"The authorities are not that determined to crack down on the housing market because it is not in their interest to do so," said Professor Ngai-Ming Yip, an urban studies expert at City University of Hong Kong. He pointed out that land premiums and stamp duties from property transactions make up a significant portion of government revenues.
Hong Kong's real-estate market is affected by Federal Reserve policy because its currency is pegged to the U.S. dollar. The Fed's loose monetary policy since 2008 has been one of the causes for the low mortgage rates in Hong Kong.
Lately the Fed has started to raise short-term rates and has laid the groundwork for shrinking its $4.5 trillion portfolio of bonds and other assets. Mortgage rates in Hong Kong have risen slightly in recent weeks after the authorities expanded risk management requirements for banks extending residential mortgages. But rates are generally still low compared with historical averages.
But if rates rise it could have a major impact on the city's housing market because many mortgages have floating rates. Prices also would likely fall because buyers would be facing higher borrowing costs.
The high prices are contributing to a housing shortage in this city of 7.3 million people that dwarfs comparable problems in other cities. Developers have been responding to the supply and demand imbalance by building tiny flats sometimes described as " mosquito apartments.
Many residents live in homes the size of a parking space while people with lower incomes live in cage homes the size of a bunk bed. These have resulted in numerous photo essays online depicting their cramped conditions.
The lack of affordable housing options also contributed to discontent that fueled the pro-democracy protests in 2014, where supporters carried yellow umbrellas and blocked streets for weeks.
"More and more Hong Kongers find it impossible to afford private housing, and are forced to join the queue for public ones," said Joshua Wong, a 20-year old pro-democracy activist, adding that the average wait time for a public housing unit is 4.6 years.
He expressed skepticism that no matter how many public housing flats are built, the root of the housing problem will remain if the government doesn't improve its long-term planning and change its favorable policies toward developers.
"The authoritarian rule together with the government's lack of empathy toward the society will only add fuel to the people's resentment," said Mr. Wong, who was arrested last week during a protest before the arrival of Chinese President Xi Jinping. He said he was released after 32 hours of detention.
The government has pledged to increase the supply of affordable housing. It has promised an additional 94,500 public housing units to be built the coming four years, a higher rate of production than previous years. The stock of public housing flats rose 74,000 between 2006-2016, according to data from Hong Kong Housing Authority.
"People have to buy smaller and smaller apartments in Hong Kong at higher and higher prices," said Vincent Cheung, deputy managing director, valuation and advisory services at Colliers International.
Write to Esther Fung at esther.fung@wsj.com
(END) Dow Jones Newswires
July 04, 2017 05:44 ET (09:44 GMT)