Hong Kong Property: Brace For Higher Interest Rates21 September, 2011, 2:30. Posted by Zarathustra
Tags: Hong Kong, Interest Rates, Property, Real Estate
I have explained early this year that interest rates in Hong Kong is not only a function of Fed Funds rate, but also many other factors. More importantly, the money flow into or out of the banking system. Thus I strongly suggested that it is wrong to assume that interest rates can stay low in Hong Kong as long as the Fed is still easing. And as the monetary tightening in China started to show its impact to the Hong Kong monetary condition, I became bearish on the Hong Kong property market, and warned the macro risks which may trigger outflow of capital, and thus the tightening of monetary condition in Hong Kong.
When I started discussing the prospect of rising interest rates in Hong Kong without the Federal Reserve tightening, it was absolutely not a popular thing to say as most people were so bullish, believing that there is no reason why interest rates will go up, and rents are rising, real interest rates are negative, etc. The reality is, mortgage rates have risen by more than 225 basis points from the lowest point of less than 1% to around 3.25% now. That’s a very remarkable tightening, consider that most major central banks raise interest rates with 25-basis-point step, and they meet once a month, which means it will take 9 months for any central bank to tighten that much. Now the banking system in Hong Kong has tightened that much in roughly 6 months all by itself, and more is still likely to come.
Such a tightening of monetary condition has actually caught me by surprise even though I have forecasted rates to go higher without the Fed tightening (and the worst possible scenario in my head has not happened yet), so it would have been a very big surprise for majority of people who thought that this was impossible. Some people like Andrew Look has started talking myM1 money supply hypothesis, which I have put forward long time ago. So some have belatedly understood (I hope) that mortgage rates are not a mere function of the Federal funds rate, or the strength of US dollar, etc.
With tighter monetary condition thanks to tightening in China and the on-going market jitters in the developed markets (which may lead to money being pulled out of emerging markets, as the latest South Korean authorities’ action demonstrated), I am here expecting interest rates to go even higher. Depending on the property classes, residential property market yields are now roughly 2.5% – 3.8% according to the latest figure from the government. Net of expenses and mortgages, investors who are looking to buy and let out a piece of residential properties, I suspect, will be disappointed by the return here. In short, property investment has already become unattractive to say the least.
With slowing economy, I expect rental growth would slow, and could turn south in the last quarter or early next year. Together with tighter monetary condition, I also expect inflation to come down towards the last quarter or early next year. Taken all these into account, my central guess would be that real interest rate could turn slightly positive in the first half of the year. If my central guess is right, all the reasons that the property bulls rely on to make their case will be gone by mid-2012.
Yet, as I pointed out quite a while ago, the physical property market turns before real interest rates turn positive and rents drop. By the time you recognise this factors are working against the bullish case, the property market would have fallen.