Interest rate hikes may trigger a correction but not a rout in the city's property prices
Updated: 2016-11-28 09:01
By Peter Liang(HK Edition)
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The increasingly likelihood of an US interest rate hike in mid-December has stirred widespread speculation about the impact of rising borrowing cost to Hong Kong property prices.
A common assumption is that the projected increase in debt-servicing cost will force some developers to hasten the unloading of their inventories of unsold apartments, resulting in a strong downward pressure on unit prices. Some economic analysts have predicted a decline in the average price of small- to medium-sized apartments by up to 15 percent in the 2017 first half.
Pessimists warned that the snowball effect of the price decline, exacerbated by repeated rate hikes in 2017, could send the local property market into a tailspin in the second half of the year. By then, they expect that many mortgage borrowers, including homeowners and investors, will be caught in the dreadful dilemma of negative equity. Under such circumstances, more and more mortgage borrowers may become unwilling or unable to hold onto their properties.
But this common assumption fails to take into account the financial strength of the major developers who collectively control the supply end of the property market. It has also underestimated the determination of the average homeowner and investor in keeping their property assets even in the most trying times in the belief that their value will eventually bounce back.
It is easy to be misled into thinking the property market would take a serious blow from rising interest rates. Indeed, the property price surge that reversed the down cycle in the previous 12 months can be largely attributed to exceptionally low borrowing costs.
Widely available easy credit is seen to have released the latent demand and touched off a rush by potential home buyers to take advantage of the generous offers from banks. In the past several months, property prices have increased an average of nearly 10 percent pushing them to near the peak in early 2015.
The buying spree has made it possible for developers to profitably unload their new apartments in projects that were planned years ago when the market was on the boil. As such, the opportunity helped avert a supply glut that had many developers worried at the beginning of the year.
Flushed with cash, developers have regained control of the supply chain. Their low gearing has freed them from the fear of rising interest rates by greatly reducing the need to resort to fire sales to meet increased debt servicing costs. The enhanced financial clout is giving developers the flexibility in adjusting the supply of apartments to keep prices firm should demand fall.
It is well-known that Hong Kong home buyers and investors care more about projected price trends than costs and interest rates. By most measures, Hong Kong properties are largely overpriced. Indeed, property prices are seen to have risen beyond the affordability of the average family. Results of a recent survey by the Legislative Council show that rising property prices have greatly pushed up household debt in recent years.
But the demand for property is showing no sign of waning. Prices have continued to rise because many prospective home buyers believe that if they don't make the plunge now, they will never be able to afford it later. As some prominent developers put it, the demand for property in Hong Kong is inelastic.
For this reason, homeowners are very reluctant to let go of their properties even in the worst of times. Defaults on mortgage loans were much lower than expected in the property market crash following the outbreak of the Asian financial crisis when average prices fell a whopping 60 percent from their earlier peak.
At that time, the market was further battered by the sudden large outflow of foreign capital against mounting worries about the government capability in maintaining the currency peg. There are no such worries now. The appreciation of the local currency in tandem with the strong US dollar has continued to attract overseas investments in Hong Kong dollar-denominated assets, particularly properties.
Of course, the psychological effect of rising interest rates should not be ignored. A market correction within the 10 percent to 15 percent range, as predicted by economic analysts, is possible. But the price adjustment is not expected to turn into a rout as it did in 1997 because the economic fundamentals have remained sound.
The author is a veteran current affairs commentator.
(HK Edition 11/28/2016 page1)