Regular rate hikes put Hong Kong’s housing market to the test

Property and Tax

Just a few days ago, the US Federal Reserve announced that it would raise interest rates by 0.25%. It’s certainly a timely piece of good news for the Hong Kong Government, prompting the Hong Kong Monetary Authority to alert the public that with the new interest rate cycle, homebuyers need to think carefully about the added pressure on their mortgages.

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However, market realities took us by surprise yet again. Hong Kong banks publicly announced that they have no immediate plans to follow the rate hike, as Hong Kong is still seeing a surplus in funds and no signs of these funds dissipating. By checking domestic money supply statistics published by the Census and Statistics Department, I came to the shocking realization that after the Fed announced a 0.25% rate hike in December, 2016, Hong Kong’s M3 supply was miraculously recorded to increase by over HKD$40 billion in the following three months. In other words, after the last US rate hike, hot money lingering in Hong Kong didn’t go away as expected, and instead there were more funds coming into Hong Kong for unknown reasons. Domestic money supply, which should have dropped in volume, increased, resulting in the fact that local banks—drowning in the massive surplus—not only were unable to increase interest rates but were desperately seeking channels to allocate the new funds.

Looking back at the past three months, ultra high mortgage rates have become the norm, attracting legions of homebuyers in the primary market - could this be related to the excessive funds in banks? In any case, decision-making bodies in banks are not joining the rate-increase wave for now. 

After all, the US has been the world’s single biggest economy in the past decade. In the old days, whenever the Fed announced rate hikes, global funds—especially those from emerging economies—would immediately follow the sound of the magic flute back to the US. This phenomenon was the root of the 1997 Asian Financial Crisis, which caused a ripple effect all the way to South America, America’s backyard, before the US took actions to address it.

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Today, the Chinese has become the world’s second largest economy whose impact on global economy rivals that of the US. In many ways, China’s economic development affects Hong Kong more than the American economy does. Hence, when the US Fed increases interest rate but China doesn’t, Hong Kong, experiencing a continued surplus in money supply, cannot blindly follow suit.

A more reliable indicator of Hong Kong’s future interest rate trend will be the city’s money supply status. Once large volumes of funds leave town, we can expect the arrival of a new cycle of increased rate.

The truth is, even if the Hong Kong Government decides to increase the interest rate later, the financial burden of mortgages will still be relatively easy to carry. However, if rate hikes become a regular and long-lasting trend, or if the Fed speed up the rate increase, it may pose tough challenges for the Hong Kong property market.

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