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Hong Kong’s banks are finally raising mortgage rates. This won’t stem price gains in the world’s most expensive city for real estate. Already up 14 percent this year, Hong Kong’s home prices now overshadow those of New York and London relative to incomes.
A key reason behind the unstoppable gains: The big banks, flush with liquidity, have held off passing on US Federal Reserve rate rises, even though keeping the currency peg intact means the city’s de facto central bank has to mirror the US.
That changed. The triumvirate of HSBC Bank Plc, BOC Hong Kong (a unit of mainland behemoth Bank of China Ltd.), and Standard Chartered Plc will lift home loan rates to the highest levels in years. Those priced off the Hibor interbank rate, which have traditionally been cheapest, will be lifted to 2.35 percent, while those based off the core prime rate will be raised to 2.25 percent.
But if history is any guide, the only time Hong Kong’s real estate prices actually tank significantly is when external events strike, such as in the Asian financial crisis of 1998 and, briefly, during the 2008 financial crisis.
The government has employed plenty of measures to tamp real estate prices, such as limiting bank loans to as little as 50 percent for expensive apartments; imposing a 30 percent stamp duty on foreigners; and recently, imposing a vacancy tax to stop developers hoarding new homes. The trouble is, these solutions have had little effect.
That’s because easy money is just one part of the equation. Huge demand, especially from across the border, remains a key driver. Hong Kong has a reputation as a â€super-tier-one cityâ€, flanking a country where big urban centers like Beijing and Shanghai have benefited from turbocharged price gains in the past few years. And even after Beijing cracked down on capital outflows, buying continues from many Chinese citizens who are permanent Hong Kong residents and so pay lower stamp duties. The territory is the closest place to home for Chinese who want to park their money out sight of prying eyes in foreign currency. The falling yuan has only increased the allure of the greenback-pegged Hong Kong dollar.
Another attraction for Hong Kong real estate fans is plain-old undersupply. Just 6.9 percent of the territory’s 274,500 acres is used for housing. Government data shows that the supply of new residential units over the ten years through 2016 has fallen by 57 percent when compared against the previous decade, says Denis Ma, head of research for Hong Kong at real estate consultancy Jones Lang LaSalle Inc.
Home-buyers are probably willing to bear high mortgage rates if the yields are better than those on alternative investments, such as US Treasuries: In the 1990s, when mortgage rates were more than 10 percent, rental yields were about 7 percent.
With that sort of vote of confidence, bears should take care. While the world’s other capitals are beginning to see price falls, this one has a way to go yet. There’s more to Hong Kong’s bubbly house prices than just loose money.
— Bloomberg
Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor
and a reporter