Hong Kong’s finance chief John Tsang has urged people to remain vigilant against a potential interest rate hike and the subsequent market volatility that the tightening move might trigger.
Let’s now take at a look the likelihood of a rate hike and the possible impact on property prices.
It’s widely believed that the US Federal Reserve will be very restrained in its rate moves. At the moment, the Fed fund futures imply there may be one rate hike in December and another next year.
Now, how did property perform historically when interest rate went up?
According to data of past 25 years, when interest rates climbed slowly, home prices actually went up by 9 percent on average in 12 months. The worst case was a decline of 3 percent.
With the absolute interest rate at a low level and the pace of tightening very slow, interest rate pressure is not yet a big concern.
On top of that, inflation rate has spiked up lately, bringing down the real mortgage rate, which is typically inversely correlated with home prices.
Yet, it is worth bearing in mind some changes in the mortgage loan market.
In the past, mortgage rates were largely based on the prime rate set by each bank. But as interest rate kept falling in recent years, most property buyers chose to price their mortgages based on the Hong Kong Inter Bank Offered Rate (HIBOR) to minimize interest payment.
As of July, 92.6 percent of mortgage loans in Hong Kong are priced off HIBOR rate, the highest percentage on record.
HIBOR rate tends to be much more volatile. Last year when Fed made its first move to hike rates after a long time, HIBOR surged for a brief period. The interbank rate eventually pulled back but still settled at a moderately higher level than before.
Another HIBOR surge cannot be ruled out, even if the Fed opts to stay put. That is one thing property investors should take note of.
This article appeared in the Hong Kong Economic Journal on Sept. 29.
Translation by Julie Zhu
[Chinese version 中文版]
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