Hong Kong’s property market will come under some pressure in 2015 due to expected interest rate hikes in the United States, an International Monetary Fund (IMF) economist said.
US rate adjustments, which will lead to a rise in Hong Kong’s own interest rates and mortgage costs, will have a negative impact on the local housing market, Gian Maria Milesi-Ferretti, deputy director of IMF’s research department, told EJ Insight in an interview.
However, such correction may not be necessarily bad, he said, noting that interest rate hikes are likely to be gradual. The government can respond to the expected decline in property prices by loosening some of the tightening measures launched over the past few years, Milesi-Ferretti added.
“Some change in housing market dynamics is a good thing, as investors will realize that home prices can move in both directions,” the IMF official said.
While some market observers, including Barclays’ managing director Paul Louie, have said they expect Hong Kong property prices to slide as much as 35 percent in 2015, Milesi-Ferretti said such a steep drop is unlikely.
“I would have to see a pretty dramatic trigger to generate a price move in that order and magnitude,” he said, adding that the probability of having a dramatic increase in interest rates or dramatic slowdown and revision of growth prospects is “extremely low”.
The US will increase its interest rate only in a measured way, he said.
“What market has currently priced in is a very gradual increase in interest rate that peaks at 2.5 percent or 3.5 percent. To raise the interest rate mildly above the inflation is not our chief worry at the moment.”
In other comments, Milesi-Ferretti said the impact of the 79-day Occupy campaign on Hong Kong economy is extremely modest.
“If I look at what has happened over the past few months in Hong Kong, there has been an unusual situation in terms of more uncertainties,” he said. “The impact, so far we can see, is extremely modest.”
“I don’t want to say it doesn’t matter. Obviously the political situation matters for investors and people in the business sectors, but we don’t see a big impact in the data.”
However, Milesi-Ferretti warned that Hong Kong’s economy may be affected by the slowdown in mainland China.
In a research report released Tuesday, the IMF lowered its forecast of China‘s gross domestic product for 2015 to 6.8 percent due to the central government’s tightening measures on credit growth, compared with 7.1 percent predicted in October 2014. The country’s economy grew 7.4 percent last year and 7.8 percent in 2013.
Growth rate in 2016 is expected to be about 6.3 percent, and stay within a range between 6.0 and 6.5 percent for some time.
“For Hong Kong, it’s bad news in the short run that China will expand at a slower pace. However, as growth becomes more stable and sustainable, it will help diminish risks for Hong Kong in the long term,” Milesi-Ferretti said.
He added that a pick-up in the US economy and the slide in oil prices will help boost purchasing power of Chinese consumers and investors.
Off-balance sheet credit growth and a correction in property prices remain the biggest risks for China’s economy, he said.
But authorities will have the tools to offset the impact of the slowdown in real estate.
According to the IMF research report, growth in emerging markets and developing economies is projected to remain broadly stable at 4.3 percent in 2015. The estimate marks a 0.3 percentage points downward revision from a previous forecast made in October 2014.
The adjustment stemmed from slower growth in China, a much weaker outlook for Russia and downward revisions to potential growth in commodity exporting nations.
The world economy is expected to expand 3.5 percent this year, which also marks a 0.3 percentage points reduction from IMF’s previous forecast.
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