Rising debt-to-income ratio may induce price drop

A friend of mine recently pointed out that while Hongkongers tend to think China will be the bigger loser in the ongoing US-China trade war, they don’t seem to realise that the appeal of Chinese goods to western consumers started long before the country’s economic reform. The Silk Road, which facilitated the trade of major Chinese exports, has been one of the most important trade routes since the Roman Empire. In the Yuan dynasty, drawn by the rich history, advanced development and abundance of commodities in China, Venetian merchant and explorer Marco Polo famously travelled to China with his father and uncle, and befriended Kublai Khan, the ruler and founder of the dynasty. After a 17-year stint in China, Polo returned to Venice at the age of 41 and documented his Asian adventures in the travelogue The Travels of Marco Polo, which further strengthened European fascination with China and Chinese goods which led to more frequent trading activities between China and Europe.

Richard Nixon's 1972 visit to China, which laid the foundation for establishing diplomatic relations between the two nations, is another example. Many think that one of the key reasons President Nixon was willing to visit the then vastly underdeveloped China and meet with Chairman Mao, was that he believed China’s cheap merchandise—boasting excellent value for money—could satisfy American demand for affordable daily necessities. As my friend put forth, though the US seems to have the upper hand for now, in a few months’ time, the American public will start to experience rising prices because of the escalating trade war. It’s a real possibility that public resentment will force the world’s two largest economies to go back to the negotiation table and reach a mutual compromise.

While I find his theory sound, I’m also aware that most Hongkongers focus a lot more on the immediate impact of the trade war and rate hikes rather than long-term interest. This is understandable—since Hong Kong is the intermediary trade hub for mainland goods, the fresh tariffs will inevitably cause the Hong Kong economy and trade activities to wobble, which in turn is likely to result in unemployment in certain industries. On the other hand, major commercial banks have recently raised mortgage rates by a small 12.5 basis points. This means that for every HK$1 million over a 30-year mortgage period, the monthly mortgage payment will only increase by HK$100. That said, in recent years we have seen a growing number of young home buyers who, due to their meager savings, have to take out mortgages with extremely high loan-to-value ratios. For them, a subtle increase in their monthly mortgage payment can mean a big difference and if interest rates continue to climb, they will be the first to be negatively affected.

Despite the robust foundation of Hong Kong’s housing market, trade tensions and rate increases have become an obvious deterrent for home seekers to enter the market. As the projected economic downturn reduces Hong Kong citizens’ real income, debt-to-income ratio is set to rise, which is likely to trigger a fall in housing prices.