Hong Kong Property: The Beginning Of The End16 March, 2011, 3:43. Posted by Zarathustra
Tags: Bubble, Hong Kong, Real Estate
Major banks in Hong Kong increased mortgage rates last week, and some other banks followed this week. The latest quotes you can get from a bank for mortgages would probably be the Hong Kong Interbank Offered Rate (HIBOR) plus 120-130 basis points, almost doubled from the lowest point months ago when you could get HIBOR plus 65 basis points at the very lowest, and around 20-30 basis points more than two weeks ago.
Interest rates hikes by these banks have nothing to do with interest rates in the United States. Even with the currency peg, the belief that interest rates in Hong Kong will follow that of the United States is simply a fallacy, so it should not be surprising to see rates going up before the Fed. There is no major indication that funds are flowing away from Hong Kong despite the apparent weakness in Hong Kong dollar: HIBOR is still very low, and money supply actually rose back slightly in January. Some feared that Japan’s earthquake may cause funds to flow out of Hong Kong. Although there is certainly such possibility, this is not immediately obvious at this point. So I think the key reason why banks are increasing interest rates is simply that the interest rates were just too low for the banks to earn reasonable net interest margin, not a real rise in costs of funds or tighter liquidity.
Hong Kong Property Market is definitely a bubble being inflated by monetary expansion and the illusion of low supply, what it needs now is something to trigger the burst of it. In my 2011 Hong Kong Real Estate Market Forecast, I outlined some possible reasons that trigger the burst. Among them were an earlier-than-expected interest rate hikes in the United States, and the continuous tightening from China which slow down the economy and spill the effect over to Hong Kong. As of now, none of those two have happened and property prices have been steadily rising since the beginning of this year. However, mortgage interest rates are rising (albeit slowly).
Although such a rise shouldn’t be a great concern (for now), the fact that real estate prices have risen so much in the past 2 years makes Hong Kong property a very risky investment indeed, and such rise in interest rates weighs on sentiment. Together with the impact of Japan’s earthquake, market sentiment dropped over the weekend and transaction volume fell, and the stock market crash in Japan does not bode well for the property market sentiment even though the aftermath of Japan’s earthquake has very little to do with Hong Kong.
Overall, these may mark the beginning of the end of the epic Hong Kong property bull market 2009-2011. Although I don’t expect any immediate huge drop in property prices, I believe the property market is now reaching its peak with very limited upside.