For the first time in 12 years, banks in Hong Kong raised interest rates by 12.5 basis points , putting the property market under pressure.
“The ultra-low interest rate environment in Hong Kong will be over as rates are now on an uptrend,” Mr Paul Chan, the city’s Financial Secretary, said on Thursday.
“Hong Kong’s low-rate environment has prevailed for over 10 years now, so it’s inevitable that banks would have to raise rates,” he added. That inevitable event landed this past Thursday.
Following in the giant’s footsteps
The Hong Kong Monetary Authority (HKMA), the city’s de-facto central bank, raised its benchmark interest rate by 25 basis points from 2.25 percent to 2.5 percent, following the footsteps of the U.S. Federal Reserve. The Fed raised rates as the U.S. central bank normalizes policy.
To follow suit, HSBC raised the base lending rate from 5 percent to 5.125 percent. Standard Chartered and Hang Seng Bank also raised their best lending rates by 12.5 basis points on the same day.
The rate hikes by the commercial banks – the first time since March 2006 – took effect Friday.
“Today’s change in rates marks the start of the normalisation cycle for local interest rates and we believe Hong Kong is well prepared for the change,” says Ms Diana Cesar, chief executive of HSBC Hong Kong.
“When determining the level of increase, we need to consider multiple factors including the macro economic situation, local market conditions as well as the impact on our economy and community,” she notes.
The city’s currency Hong Kong dollar is pegged to the dollar. Accordingly, U.S. tightening monetary policy could strengthen Hong Kong’s currency. The U.S. dollar surged following the conclusion of the Federal Reserve’s meeting on Wednesday.
Although this is not the first time the Fed raises rates, Hong Kong has not been following suit as liquidity is ample and competition for mortgages is fierce.
But the banks’ cash stockpiles are shrinking due to the HKMA’s purchase of Hong Kong dollar in April to defend the exchange rate with the U.S. dollar.
Property market under pressure
Mr Chan’s remark on Thursday marked the end of an era of cheap lending in Hong Kong.
Higher rates are believed to have a cooling effect on the property market as they add to the burden of homebuyers seeking loans and homeowners with mortgages.
Another dampener on buying sentiment could be a lower pay raise – 3 percent per year these days instead of 5 percent. This could further hurt homeowners’ ability to cope with skyrocketing property prices.
Hong Kong’s property market has been on the rise for the past 15 years. According to Centaline Property Agency, existing home prices surged by 13 percent this year and nearly 487 percent from 2003.
But real estate insiders refute the concerns.
Mr Sze Wing-ching, founder of Centaline Property Agency, says there will be adjustment in property price, but it will not drop sharply.
“The transaction volume of second-hand flats decreases mainly because of the uncertainty arising from the trade war, but the property price will not drop by more than 10 percent by the end of this year,” says Mr Sze.
He says Hong Kong dollar is still strong, therefore Hong Kong dollar-denominated assets should not be affected.
“Most of the homeowners get mortgages with an interest rate based on Hong Kong Interbank Offered Rate, which has already been raised. This rate hike should not add to the homeowners’ burden,” he says.
Sharmaine Lau, Chief Vice President atmReferral Mortgage Brokerage Services, says the rate hike is relatively mild this time.
“Only if banks in Hong Kong raised rates three more times by 25 basis points, then the affordability ratio would reach 70 percent. By then it would be a heavy burden for homeowners,” she says.
The affordability ratio is monthly mortgage instalment to median salary income of families living in private flats.
The last time the ratio reached 70 per cent was in July 1998.
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