House prices in Hong Kong, the world’s most expensive real estate market, could cool next year if the US Federal Reserve delivers the rate hikes it has projected, according to the International Monetary Fund.
The outlook comes as Hong Kong’s red-hot property sector shows few signs of a slowdown, with price gains of 11% this year even after the government pushed through new taxes and mortgage curbs.
The Fed could slow that momentum, according to Sonali Jain-Chandra, IMF mission chief for Hong Kong. “If the Federal Reserve’s plans to increase interest rates over the next year materialise, as expected, we should expect a moderate slowdown of house prices in Hong Kong,” she says in an email.
Fed officials are scheduled to meet on Dec 12 and 13 in Washington, with economists forecasting that they will raise the benchmark interest rate. The US central bank has lifted rates just four times in two years and put its US$4.5 trillion ($6.05 trillion) balance sheet on a very gradual path of slimming down, but further tightening is expected next year.
Because Hong Kong’s currency is pegged to the US dollar, it effectively imports US monetary policy. Higher borrowing costs in the US and elsewhere in the world would increase Hong Kong’s debt burden and suck capital away from the finance hub.
But authorities have tools to respond. If there is a housing slump, very tight macro-prudential policies and punitive stamp-duty taxes could be reversed, Jain-Chandra says.
US economic growth could cushion the impact of any tightening by the Fed or other central banks around the world, Jain-Chandra says, noting that during past periods of Fed rate hikes, Hong Kong’s growth and exports rose.
Releasing its annual assessment of the former British colony on Nov 29, IMF said that although faster global growth and ongoing reforms in China are lifting Hong Kong’s economy, “overall risks are still tilted to the downside”. It described Hong Kong’s property market as “booming and overvalued”.
Buyers continue to set new records for residential and commercial properties, putting the city in bubble-risk territory. Mass-market home prices are tipped to rise between 8% and 10% next year, according to property consultancy Colliers International Group. Real estate consultant Knight Frank expects prices of such homes to climb 5% next year, while luxury housing advances 8%.
Buyers continue to set new records for residential and commercial properties in Hong Kong, putting the city in bubble-risk territory (Credit: Billy H.C. Kwok/Bloomberg)
Because a significant portion of new mortgages are on floating rates and indexed to the benchmark Hibor, or Hong Kong interbank offer rate, borrowers are vulnerable to interest rate hikes, IMF’s report said. Interest rates for mortgages linked to Hibor have been rising since May after the Hong Kong Monetary Authority raised the capital that banks have to set aside to cover new housing loans.
“A disorderly housing price correction could trigger an adverse feedback loop between house prices, debt servicing ability and lower consumption, which would result in weakening growth leading to second-round effects on banks’ balance sheets,” IMF said in its report.
To deflate the housing boom, the authorities will need to speed up the supply of new housing stock by tackling hurdles that are blocking the release of land for development. Continued usage of macro-prudential measures also needs to be part of the policy response.
There are other worries too. An economic slump or financial stress in mainland China could spill over into Hong Kong, especially via the banking system. That echoes similar commentary from rating firms. Heightened credit risks could act as headwinds for the city’s lenders, given their exposure to China, S&P Global Ratings says in a report earlier this month.
Both Moody’s Investors Service and Standard & Poor’s downgraded Hong Kong’s credit rating this year on the back of earlier cuts to China’s status, citing linkages between the two economies.
But Hong Kong has buffers that will help it weather any storm, according to IMF. They consist of large net foreign assets and international reserves, fiscal reserves amounting to 25 months of government spending and gross debt that lies at below 0.1% of GDP. Banks have built up strong capital buffers and asset quality remains strong.
— With assistance by Frederik Balfour, and Alfred Liu
This story, written by Enda Curran for Bloomberg, first appeared on Nov 29.