September 28, 2018 / 3:40 AM / 25 days ago

Breakingviews - Fed helps Hong Kong homebuyers at owners’ expense

HONG KONG (Reuters Breakingviews) - The U.S. Federal Reserve is helping Hong Kong’s homebuyers. The city’s banks are pushing up their benchmark rates, the first hike in more than a decade. As tighter U.S. monetary policy feeds into Hong Kong mortgages, flat values look set to fall. That may open a door for younger residents, many of who have been priced out of world’s bubbliest property market, but it could also tax economic activity.

Residential blocks are reflected on the glass panes of a business tower in Hong Kong November 3, 2010. REUTERS/Bobby Yip/File Photo

Hong Kong commercial banks, including HSBC, Standard Chartered and others said on Thursday they would lift their prime rates. It’s the first such increase since the U.S. Federal Reserve started raising rates in 2015. Hong Kong’s de facto central bank, which maintains a currency peg to the U.S. dollar, has matched those moves with its base rate. In the past ample liquidity had prevented those changes from feeding fully through into bank lending. Now the tightening will start having a bigger impact.

Homebuyers in the territory generally base their loans on either the Hong Kong Interbank Offered Rate or bank prime rates. HIBOR started floating upwards since 2016 and many banks have already raised the price of new loans. The latest hikes will raise the cost of servicing the nearly HK$1.3 trillion ($162 billion) worth of outstanding mortgages at the end of July, according to the Hong Kong Monetary Authority. That combination will likely dampen real estate demand. Nicole Wong, regional head of property research at CLSA, says the sector faces the worst headwinds in 15 years; she forecasts a 15 percent decline in home prices over the next year or so.

It will have a wider economic impact too, given how important real estate is to Hong Kong’s economy. Higher debt servicing for those with mortgages, including for both residential and commercial borrowers, could cut into spending and investment. For better and worse, the Fed is draining the punch bowl at Hong Kong’s property party.

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