Morgan Stanley Thinks Mortgage Rates In Hong Kong Will Be At 5%5 November, 2011, 19:21. Posted by Zarathustra
Tags: Hong Kong, Property, Real Estate
Since early this year, I have already warned about something very obvious but no body thought so: Federal Reserve does not determine interest rates in Hong Kong, but the Hong Kong banking system does. With the monetary tightening in China as well as increasing macro risks, I have long expected that these factors would tighten monetary condition. Indeed, we have seen gradual tightening of monetary condition in Hong Kong over the past 7 or 8 months, yet we can still see quite a few people not getting it despite the latest monetary statistics from Hong Kong Monetary Authority showing that all money supply measures have dropped year-on-year in September while loan-to-deposit ratio continued to surge.
Andrew Lawrence of Barclays Capital was the first sell-side analyst who got it and turned bearish on Hong Kong property sector at almost the same time as I did, so hats off to Andrew “skyscraper index” Lawrence. And now Morgan Stanley just came out and think that mortgage rates will be at 5% in Hong Kong because most mortgages based on HIBOR will become predictably unprofitable as monetary condition tightens and funding costs increase. That is very predictable because mortgages based on HIBOR in 2010 or so would be priced at a little more than 1% at current rate. With monetary condition tightened, funding costs increase, and banks are competing for deposits by offering more higher interest rates, that should not at all be surprising that mortgages were totally unprofitable, and to make money, banks will have to ask for much higher rates for future new mortgages.
Besides the 5% mortgage rates shocker prediction, unfortunately, there is nothing else worthwhile of mention in the latest research note because the very bearish judgment on monetary condition as they recognised is only translating into 10% or more correction of prices over the next 12 months in their view. The reality is that if mortgage rates could ever get to 5% (which is not at all unlikely), at current rental yield of around 3%, owning properties in Hong Kong has become completely unattractive as an investment option. Even if rents remain at today’s level (which is unlikely), you need to get yield to at least to 5% to make properties investment looks attractive, and that implies that a 40% drop of property prices is necessary. Unfortunately, as explained many times here, rental growth tracks GDP growth closely and lags the property prices cycle, so with weakening economic outlook, rents should fall, and that would mean that it property prices will have to fall even more to make properties investment looks attractive again.
As such, Morgan Stanley’s view of 5% mortgage rate is inconsistent with their own view of 10% or more correction of property prices over the next 12 months. If mortgage rates could ever rise to about 5%, property prices would more likely be halved rather than falling by 10%.