Hong Kong’s long-maintained “super low interest rate environment” may soon end, which could bring adjustment to the red-hot property market, adding pressure on family debt and assets, the city’s financial chief has warned.
Financial Secretary Paul Chan Mo-po’s comments, in a blog post published on Sunday, came after 15 banks, including all top 10 mortgage lenders, which combined have 86 per cent of the mortgage market share, announced increases in their mortgage rates last week, affecting all new homebuyers.
Existing mortgage borrowers, who have a total of HK$1.26 trillion in outstanding mortgage loans, may soon face similar pressure as banks are expected to increase their best lending rate, or prime rate, as early as the end of this month – the first rise in 12 years.
In his blog post, Chan said the United States, which had increased interest rates seven times since late 2015, was likely to have another two increases in the second half of this year.
He added that the ongoing trade war between China and America would affect the US’s economic outlook and inflation, adding to the uncertainty of the country’s future interest rate increases.
“Under the linked exchange rate system, Hong Kong has to follow suit to increase interest rates sooner or later,” Chan said. “The past long period of a super low interest rate environment may soon end.”
Chan pointed out that about half of Hong Kong families’ assets were related to property, which would inevitably be affected by any market adjustment.
But he said the average proportion of family income used for paying mortgages remained at a record low compared to the level during the 2008 global financial crisis.
The extra, more risky, mortgages provided by property developers only accounted for 2.6 per cent of all bank loans last year, he added.
“We can say that in general, the debt situation among Hong Kong families has not [created] any hidden financial safety risks,” Chan said.
But he warned that general figures could only reflect the macro market situation, while increasing interest rates could still put “relatively big potential pressure” on families’ finances.
He called on families to be cautious about financing and to maintain enough cash for potential market fluctuation.
Hong Kong has been consistently ranked the world’s least affordable property market. As of the end of July, home prices had risen for 27 consecutive months.
Economist Andy Kwan Cheuk-chiu, director of the ACE Centre for Business and Economic Research, believed the interest rate rise last week and the upcoming increases would not be high enough to cause a property market crash.
After last week’s increase, the mortgage rate now stands at 2.35 per cent.
This is still a marked difference from the 10 per cent rate in 1997, when the market was peaking, Kwan said.
Kwan said he was worried that the US’s continuous interest rate increases would strengthen its currency against those of emerging markets, leading to capital outflow from those markets.
This could further worsen the financial crisis in emerging markets, such as the plunging Turkish lira after US president Donald Trump doubled steel and aluminium tariffs on Turkey amid ongoing political tensions, he said.
He added that the crisis could spread to a wider region, becoming a global financial crisis that could eventually crush Hong Kong’s property market.