Rising interest rates in the United States and a slowing Chinese economy are set to deliver a double whammy to the world’s most expensive housing market.
High interest rates in developed countries pose risks to housing markets around the world, which have been fueled by cheap mortgages over the past decade. Even land-hungry Hong Kong – which has long held the dubious title of the world’s most expensive real estate market – may now find it hard to defy gravity.
Hong Kong’s monetary policy is heavily influenced by the US Federal Reserve due to the city’s peg to the dollar – which has long been the cornerstone of Hong Kong’s appeal as an international financial center. Higher rates in the US will require higher rates in Hong Kong because keeping interest rates in the city low is likely to drive capital outflows, putting pressure on the currency peg. During the last Fed rate hike cycle in 2016 and 2018, Hong Kong rates closely followed US interest rates, until the pandemic sent all central banks into easing mode again in 2020.
So far, Hong Kong’s short-term interest rates have remained at very low levels. The one-month interbank offered rate in Hong Kong – on which many mortgages depend – is about 0.24%. This is partly due to the abundance of liquidity that continues to proliferate in the city’s banking system. The overall balance – a measure of liquidity in the system – has declined since the summer of last year, but it remains at a relatively high level of about $41 billion.
Meanwhile, spurred on by inflation fears, the Federal Reserve raised interest rates more aggressively this time around. US rates may also remain higher for longer. The widening of the price differential between Hong Kong and the US may eventually drive large amounts of capital out of the city, especially with the Chinese economy also slowing. In fact, Hong Kong’s one-year interbank rates have already risen to 2.58% from 0.43% at the start of the year – reflecting market expectations of higher rates going forward.
Compared to other advanced economies, property prices in Hong Kong have been relatively low in the past two years, although they are still at extreme levels relative to average incomes. Prices have been moving sideways in the past four years, according to an index prepared by real estate agent Centaline. The political crackdown following the 2019 protests as well as the strict restrictions related to the novel coronavirus (Covid-19) have led to an exodus of people from the city. The government estimated the city’s population at the end of last year at 7.4 million, down 1.6% from 2019.
Buying an apartment in Hong Kong has always been a winning bet. The odds look less favourable at the moment – especially if city dwellers continue to leave and the Chinese economy continues to slow, both on a cyclical and structural level.
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