For the second time in recent months, Hong Kong’s Finance Secretary, Paul Chan, has issued a warning on the country’s housing market.
“One has to be very careful if one really wants to buy a property in Hong Kong,” said Secretary Chan on Tuesday morning.
“I would not be surprised if there will be a certain adjustment in the market,” he added.
The Hong Kong dollar fell following Chan’s remarks, pushing USD/HKD back above 7.813.
In recent days, the currency has, by its own standards, had a tumultuous time, having made back three months’ worth of losses in just eighteen hours spanning last Thursday and Friday. According to Mizuho’s Asian FX strategist Ken Cheun, the move was likely driven by “a sizeable amount of capital being moved into Hong Kong dollars, which triggered stop-loss [orders] in the market.” Gains were short lived however, with the Hong Kong dollar giving back more than half of those gains prior to Friday’s end.
Since 2005, USD/HKD has been restricted by Hong Kong’s central bank, the Hong Kong Monetary Authority, to moves within a 1.3% range, between 7.75 and 7.85.
At 07:00 GMT on Tuesday, the US dollar, euro and Australian dollar were fetching 7.813, 9.354 and 6.279 Hong Kong dollars respectively.
Hong Kong Homes in Focus
Home prices in Hong Kong rose at an annualized rate of 20% in the year to July according to provisional government data, and in 2016, Hong Kong was ranked by property consultants Knight Frank as the world’s most expensive city for buying property. Knight Frank said at the time that USD 1 million would buy a home in the city averaging just 20.6 square metres.
Tuesday’s comments by Secretary Chan can be added to those from June in which he described the development of a potentially “dangerous situation.”
“We have to warn our people about the dangerous situation of the property market. No one can tell how deep the [housing market] adjustment will be or what is the appropriate level of adjustment…[and] I think it is important for people to recognize it is risky,” Chan told Bloomberg TV.
The source of the Secretary’s concern is the normalization of monetary policy and interest rates by the US central bank, the Federal Reserve.
As the consequence of a decision to peg its national currency to the US dollar, Hong Kong must effectively import its monetary policy from the US, which means that as the Fed raises US interest rates, as it has done four times since December 2015, and proceeds with its stated plan to unwind its behemoth of a balance sheet (worth an estimated $4.5 trillion), the cost of borrowing in Hong Kong will inevitably rise back to more normal levels.
The base rate in Hong Kong had been close to 7% in 2007 but was slashed to just 0.5% – a level at which it stayed for seven years – during the height of 2008’s financial crisis. Since December 2015, the rate has risen in step with the Fed funds rate to its current level of 1.5% (Fed funds 1.25%).
To the disappointment of policymakers this year, commercial banks in Hong Kong have so far refused to raise their advertised loan rates along with increases in Hong Kong’s base rate, owing to massive amounts of available capital and fierce competition for borrowers. But it is surely only a matter of time before the banks’ positions are no longer tenable. The South China Morning Post’s Alun John explains:
“As real interest rates remain flat in Hong Kong but rise in the US, funds are likely to begin flowing out of the city in search of higher-yielding US assets.”
John continues by quoting the chief executive of the Hong Kong Monetary Authority, Norman Chan Tak-lam, who says that “when these capital outflows quicken, it will lead to tighter liquidity in the banking system.”
Indeed, the era of cheap money globally appears to be nearing its end. Evidence for this comes from the Bank of Canada, who have raised interest rates twice since July, and from ECB President Mario Draghi, who said on Thursday that in spite of significant euro appreciation this year the central bank will begin a discussion about tapering its massive bond-buying program at next month’s meeting.
For Hong Kong’s housing market, the end of cheap money is set to coincide with a significant increase in supply, and is therefore likely to threaten homes prices more than it otherwise would have. In July, the Transport and Housing Bureau estimated that nearly 100,000 new homes will come onto the market within the next three to four years.
Going forward, with borrowing rates expected to rise, buyers in Hong Kong and elsewhere in the world should seek to lock in fixed-rate mortgages or otherwise carefully evaluate their ability to pay a mortgage before diving in to new home purchases.
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