This is it. This is the year interest rates finally go up. We’ve heard this before, of course, but most analysts predict real action this time and lo and behold, the Fed increased rates on December 16th. Interest rates, however, are just one of a host of challenges property markets everywhere will face in the coming months. Though it’s unlikely any single trend will lead to disaster, they could add up to one of the most eventful years is recent history. So what is everyone seeing in their crystal balls?
To address the elephant in the room, the US Federal Reserve hiked its rates for the first time in a decade 25 basis points at the end of the year. “People used to think the global economy was too fragile for rates to rise, but US unemployment is at a multi-year low of 5 percent, strong numbers are coming out of major markets, and there is the prospect of inflation around the world. With UK and US interest rates, it’s a case of when, not if,” says IP Global Distribution Director Jonathan Gordon. Unlike many, Gordon isn’t fretting over it. Rising interest rates are generally a sign of economic recovery, and happen when central banks are feeling confident in fundamentals. “And what’s more, we won’t see interest rates spiking in 2016. They will be moving higher gradually, leaving the market plenty of time to digest the changes,” notes Gordon. “When it does happen, it certainly will not take the majority of property markets by surprise.”
Simon Smith, senior director research and consultancy at Savills, agrees and predicted that after years of crying wolf, Janet Yellen and Co would go 25 basis points, and “Then they won’t rise too soon thereafter. More importantly is its indication to the market of where we’re heading. The psychological impact will be more important than the rates themselves,” he theorises.
The key question for many potential homeowners in Hong Kong is how those rates will affect affordability, already on shaky ground. Knight Frank estimates a $500 mortgage payment increase for every $1 million loaned with a 100bps rate rise. Not crippling, but Colliers International’s Joanne Lee, senior manager research and advisory, sees it differently. “We’re at peak. In mass residential prices have risen by nearly 200 percent and so the market is very vulnerable to a downturn. Rates will have an impact on affordability.”
The World View
The United States economy has flirted seriously with recovery — hence the rate hike — and that’s fortunate for most of us as all eyes are on the Mainland in the immediate future. “The hard landing in China is everyone’s biggest fear — not just in Hong Kong, but globally,” says Smith. “That said, I think the slowing is overstated in some respects. The slowing is not uniform, it’s very much restricted to the north and northeast where there’s heavy manufacturing and a strong export economy … What’s happening in Shenzhen is not what’s happening up in Shenyang,” he explains, noting the southern services-based economy is still growing.
In the UK, a new stamp duty on non-resident owners investing for rental has already caused a few waves, but most expect the strongest markets of 2015 to continue their pull for institutional investors, which individual investors inevitably follow. Little is going to deter people from London, and Australia will remain a hot location. Elsewhere in Asia-Pacific, Japan (Tokyo and Osaka), Vietnam (Ho Chi Minh City) and Sydney and Melbourne will be the jewels of 2016. “Asia’s real estate markets are the product of almost eight years of easy money from the world’s central banks. Although easing in the US may be ending, both Japan and the European Union continue to provide liquidity, while interest rates in many Asian countries are lower than one year ago,” stated Raymond Chow, Urban Land Institute North Asia chair in a statement for ULI/pwc’s Emerging Trends in Real Estate Asia Pacific 2016.
But there are those interest rates again. For global investors, “Property in safe haven markets remains attractive as one of the most stable asset classes, especially compared to bond and equities markets which have seen significant volatility in anticipation of the rate rise and ongoing uncertainty in the Mainland Chinese economy,” says IP Global’s Gordon adding a stronger Hong Kong dollar could be a happy side effect for overseas buyers. CBRE doesn’t see a disruptive impact, though yields could be affected depending on the market. The Australian dollar and the Yen could both face pressure, and Singapore has already factored a change in US rates in its SIBOR. For now, South Korea has no plans to change its rates given its high level of household debt.
Home Sweet Home
In mid-December Chief Executive CY Leung stated there would be no relief from the cooling measures put in place in Hong Kong since 2013. “We are seeing in recent months a slight dip in rent and prices … Government is determined to address the question of housing and shortage issues by increasing land supply, public rental housing supply and to curb … investment demand, speculative demand and demand from outside of Hong Kong,” Leung told the media, adding it was not the government’s job to ensure property prices do not fall.
Hong Kong’s residential market is sitting at something of a tipping point. IP Global’s Gordon likes the government’s commitment to remedying chronic undersupply, pointing out the current two-tier sales environment: the primary and the distinct secondary markets. He sees primary vendors cannibalising secondary sales, which dropped significantly in 2015. According to research by Knight Frank, the secondary accounted for 84 percent of all purchases in 2007. Last year they had dropped to 72 percent. “The combination of these incentives and the expectation of more units coming to market has caused estate agents to downsize, and should in time cause the secondary market to soften further,”
Colliers, Knight Frank, Savills, DTZ/Cushman & Wakefield and Jones Lang LaSalle all agree, with each predicting softening prices and muted transaction volumes. The idea was that with plummeting transactions the cooling measures might be rolled back, an idea Leung put to pasture. DTZ/C&W’s Senior Managing Director Alva To thinks it’s the right move. “It’s not the right time. The government’s objective is to stabilise the market until a healthy supply pipeline is realised. We’re not seeing prices trending up at the moment, it’s a consolidation period and that only started two months ago. I think they’ll look at the long-term, and future development until a health supply pipeline is in position,” he argues. JLL Managing Director Joseph Tsang disagrees.
“I don’t agree. I do think this is the right time to review the cooling measures, based on such limited transactions. The majority now are in the primary market because they can off the stamp duty rebates and financing and so on, and leaving the secondary market with limited transactions. And that’s absolutely not healthy to the market,” he stresses. Tsang points out resales are currently difficult, vendors could face price pressures, and in addition to extra duties the Monetary Authority is actively hamstringing potential buyers by demanding they have a de facto cash reserve. “The LTV is limited to 70 percent for smaller lump sums and 50 percent for larger lump sums, but that’s not the end of it. More serious issues are the pressure test,” Tsang notes. “They assume 200-odd basis points on top and so your debt servicing ratio is further increased. After all the calculations what you can borrow, effectively, ranges from 30 percent o 60 percent. And that’s purely monetary policy. The banks are quite willing to lend but they’re under direction of the Monetary Authority. It’s a joke.”
Savills’ Smith echoes Tsang and Colliers’ Lee, noting one of the biggest hurdles for Hong Kong to clear in the future is the issue of affordability. No market can thrive with weak domestic demand. “Affordability is challenged. If you look at affordability in terms of mortgage costs versus rental yields then it still looks very benign. That’s been disguised by low interest rates,” finishes Smith. “If you look at affordability in terms of incomes or house prices as multiple of incomes, you see that this is a very expensive market globally, and something has to give.”