The weakening HKD gives warnings signs to homebuyers

stephen or

The U.S. economy has had a great run recently, with unemployment rates continually dropping, which some have credited to President Trump’s tax cuts for these positive developments. It has even been reported that American companies’ overseas are experiencing profits and are gradually making their way back to the U.S.. Though that is a good thing, pundits have also pointed out that only a small portion of the returned funds is being reinvested in the economy, while most of the money is poured into U.S. stocks and the bond market. At present, the Americans are incredibly active in the stock market, and the rising stock prices have given them confidence to invest. In addition, tax cuts and economic growth have encouraged domestic consumption, prompting experts to predict that there will be up to four interest rate hikes. On the flip side of the coin, the Hong Kong dollar has been repeatedly hitting the lower limit of its trading band, resulting in HKMA interventions. Meanwhile, as the Hong Kong Interbank Offered Rate continues to drop, certain banks have stopped taking fixed interest mortgage applications. 

As per common knowledge, interest rate hikes are usually a result of regional economic growth. To prevent an overheated economy and curb inflation, governments will raise interest rates as an effective instrument to regulate the region’s finances, which is what the U.S. Federal Reserve is understandably doing. Theoretically, Hong Kong, whose currency is pegged to the greenback, should have also seen interest rate hikes, but the reality is that due to a severe overflow of funds, Hong Kong has yet to make moves despite several interest rate increases. The downside is that Hongkongers currently paying off their mortgages are dangerously unaware of the mortgage increase that is looming on the horizon, while those seeking their first homes are ignoring the powerful consequences of potential interest rate hikes. To this day, there are still buyers out there without sufficient funds for a down payment, eagerly trying to purchase new development units with extremely high loan-to-value ratios, while the secondary market keeps seeing new record-breaking sales numbers. Home prices are not likely to come down anytime soon.

As the U.S.-China trade war heats up, conflicts are inevitable. Hong Kong, with its unique geo-political position, sits in the middle of a U.S.-China tug-of-war and has a lot to lose, meanwhile, home owners are faced with uncertainties caused by the currency and interest rate fluctuations. Personally, although I have taken precautions against possible standard interest rate hikes in the future, it is difficult to predict what kind of impact—or rather, destruction—the trade war and currency instability are going to have on Hong Kong’s housing market. The way I see it, increasing out-of-the-norm interest rates can play a defining role in defeating the housing market.