27 October 2016
Hong Kong's property market will get dented if there is any major capital outflow from the city. Photo: HKEJ
Hong Kong's property market will get dented if there is any major capital outflow from the city. Photo: HKEJ

HK home prices: Why you should watch HIBOR more closely

The long-anticipated Fed liftoff took place last month, with officials also hinting at more tightening moves in 2016. Following the US rate move, Hong Kong’s housing market has been under pressure and is showing signs of a correction.

Now, we need to give this a thought: to what extent will the Fed rate hike affect the local mortgage rate?

The Centa-City Leading Index has run out of steam after hitting a peak of 146.92 points in the third quarter of last year. The overall average housing price has dropped by 7.5 percent from the peak as of December 27.

Market commentary has focused on the US rate hike in discussing the housing market correction. In fact, the rate increase may not necessarily lead to a housing price fall. Housing prices usually recover within six months after the first increase in the city’s prime rate.

In addition, local banks have limited room for raising their interest rates, and they are likely to lag behind the US rate moves. Also, a rise in mortgage rate may have less obvious impact on home-owners than it used to.

More than 80 percent of new mortgage applications are HIBOR mortgage plans, and only 13 percent mortgage plans are based on prime rate as of November 2015, according to data from the HKMA. If banks raise the prime rate, it would have limited impact on existing mortgage loans.

The HIBOR rate will depend on market liquidity. Massive capital has flowed into Hong Kong after the 2008 financial crisis amid monetary easing by central banks in developed markets. The monetary base has soared nearly four times to HK$1.6 trillion from US$320 billion in late 2008.

As the Fed has begun to unwind its easing measures, excessive market liquidity may end. However, many Hong Kong investors have got rid of yuan deposits in light of the currency’s devaluation since last August. This has helped inject liquidity into the local market. The city’s monetary base has jumped by more than HK$170 billion or 10 percent since August 11 last year.

Given this situation, abundant Hong Kong dollar liquidity is set to continue in the market. If the yuan weakens further, liquidity inflow will arrive again. That would cap the upside of HIBOR rate.

The gap between weighted mortgage rate and three-month HIBOR rate moves in the range of 0.5 to 2 percent for most of the time. Currently, the spread sits at the top of the curve. Local banks still have room for delaying rate hikes and staying behind the Fed.

Investors should watch HIBOR movement closely as that rate will have greater impact on housing prices in the future.

This article appeared in the Hong Kong Economic Journal on Jan. 7.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal chief economist and strategist

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