Date
17 October 2018
Low real mortgage rates and an expected delay in actual delivery of new supply suggest the local property market will stay robust for the time being. Photo: HKEJ
Low real mortgage rates and an expected delay in actual delivery of new supply suggest the local property market will stay robust for the time being. Photo: HKEJ

Will higher rates hit HK property prices right away?

Market opinions are fairly divided over the prospect of Hong Kong housing prices this year. I believe there is further upside, although moderate, before housing prices start to level off by the end of the year.

The official private home price index hit a new record high of 306.6 points in November last year.

The government unveiled further tightening measures that month but so far the policy move has failed to tame the home price rally.

With interest rates rising and supply estimated to go up, are home prices set to come off quickly?

Historically, the impact of an interest rate rise on housing prices largely depends on the real mortgage rate (nominal mortgage rate minus inflation).

And the real mortgage rate has been hovering in negative territory between 2010 and the third quarter of last year, underpinning Hong Kong’s home market throughout the six-year period.

The Federal Reserve is expected to accelerate its rate hiking pace but inflation is also expected to pick up this year, so the change in the real mortgage rate could be limited.

Even assuming the inflation rate stays at the current level of 1.2 percent and local interest rates go up by three quarter points, real mortgage rates will still be low, thus unlikely to put much pressure on property prices.

In the meantime, the potential private home supply may reach a historical high of 92,000 units in the next three to four years, according to data from the Transport and Housing Bureau.

New housing supply could weigh on prices but given the usual pattern that actual delivery lags behind the schedule by two years, supply pressure won’t be imminent.

Instead, supply probably won’t start to increase until late 2017 or early 2018. 

That is one key reason I predict a more significant correction won’t be due until then.

There are also a number of technical indicators that can shed some light on the property market outlook.

The 12-month new home sales value has increased by only 16 percent since the end of last year. Historical data shows that home prices usually start to head south when the growth clip hit 90 percent or higher, a situation where new supply will soak up most of the purchasing power.

As such, it would likely take at least six months for the gauge to reach that level.

The proportion of estates with market prices trading above the 10-week average among the city’s 128 housing estates can also provide some hint.

Historical data shows that home prices will only start to reverse the uptrend or go through sustained consolidation when the ratio falls below 50 percent. It is now about 60 percent.

This article appeared in the Hong Kong Economic Journal on Jan. 12

Translation by Julie Zhu

[Chinese version 中文版]

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RT/RA

Hong Kong Economic Journal chief economist and strategist

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