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18 JUN 2018

Hong Kong residential market momentum remains at a cyclical high

The latest Hong Kong Residential Market Survey shows a further pick-up in momentum across the housing market. However, with interest rates hitting a 10-year high so far in June, will prices and rents continue to rise?

Respondents were nearly unanimous in reporting that prices increased in May, resulting in the highest reading of past price growth (in net balance terms) since the surveys inception. Likewise, the Confidence Index reading reflected this continued positive momentum. The index, a composite measure of price and sales expectations, increased for a second consecutive month, to the highest level since March 2017.

Demand from mainland Chinese buyers rebounded in May. This was driven by renewed interest in properties in the New Territories and Kowloon, though mainland demand in these regions has been volatile. Meanwhile, enquiries on properties on Hong Kong Island have been increasing consistently since the end of 2017. Against this backdrop, respondents’ short-term expectations for prices and sales increased sharply in May. Expectations for prices and sales over the next year continued to trend higher.

Increasing credit costs may dampen the exuberant outlook for prices in the coming months, however. One-month HIBOR rates decreased by approximately 30 basis points in May. It has since reversed course and increased by nearly seventy basis points since the first week of June. As Chart one shows, this is still historically low versus the pre-GFC period, but substantially above the post-GFC average. Perhaps owing to the time period that responses were collected, 21 May–10 June, respondents reported little change in credit conditions during May.

Data released by the Hong Kong Monetary Authority (HKMA) indicates that banks are adjusting to higher wholesale funding costs. The share of mortgage loans that are linked to HIBOR fell from above 90% at the end of 2017 to below 50% in April. These loans tend to be priced at one-month HIBOR, plus 120-140 basis points, but capped at 2.15–2.25%. Given current HIBOR rates, most of these loans are currently up against their cap. The HKMA data also showed that the share of fixed-rate lending increased from less than 5% to around 50% over the same period.

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