May 8, 2018 / 3:05 AM / 2 months ago

Breakingviews - Higher rates are likely to calm Hong Kong property

HONG KONG (Reuters Breakingviews) - Higher rates are likely to calm Hong Kong’s frothy property market. Interbank lending is getting more expensive after a decade-long slump, pointing to costlier mortgages and slower price growth. This will be manageable for banks and developers, and welcome for renters and retailers.

Residential apartments are seen under Ma On Shan peak in Hong Kong, China August 29, 2017. Picture taken August 29, 2017. REUTERS/Bobby Yip

House prices have been on a tear – as have those of offices, shops and warehouses. Second-hand home prices surged more than 30 percent in two years, according to Midland Realty, a broker. Nowadays $1 million, or HK$7.8 million, will not stretch to much more than a one-bedroom apartment on Hong Kong island. Officials have toyed with various countermeasures, such as hiking stamp duty for some buyers, but to little avail.

Change may now be coming from an unexpected quarter. The Hong Kong Monetary Authority started selling U.S. dollars in mid-April to prop up the local currency, in turn draining liquidity. That has helped to nudge up the benchmark 3-month interbank lending rate to around 1.7 percent. For the previous ten years it had averaged slightly under 0.5 percent.

These changes will feed into housing, since many mortgages are linked to the interbank rate. Analysts at Mizuho reckon a 1 percentage point increase in mortgage rates could trigger a 10.5 percent decline in home prices, assuming the basic ratio of prices to incomes remains constant.

To be sure, rates are only one factor, alongside other concerns like demand from mainland China and the pace of government land sales. Even so, sustained higher rates will cool price growth for houses and commercial property.

That’s likely to prove manageable for Hong Kong banks such as HSBC, Bank of East Asia and the local arm of Bank of China, which lend extensively against property but typically at conservative loan-to-value ratios. Most of the city’s large banks could handle a 30 percent decline in property prices without it denting their creditworthiness, reckons S&P Global Ratings. Property developers would see profit growth tail off, but start from a position of robust financial health.

Conversely, this would be excellent news for the territory’s would-be homebuyers and renters, including, on the commercial side, many retailers. After years of double-digit price increases, they are unlikely to mind a bit of a cool-down.

Breakingviews

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