Hong Kong property shares look shaky as mortgage costs increase

[HONG KONG] Hong Kong's property developers are fast falling out of favour among investors as surging mortgage costs and punitive taxes threaten to choke home sales.

A gauge of real estate companies traded on the city's stock market has tumbled 11 per cent this quarter, with developers accounting for half of the biggest losers on the benchmark Hang Seng Index, which has fallen 3.6 per cent. During the three-month period, a key interbank rate - known as Hibor - has doubled to an eight-year high, while the government also slapped a punitive 15 per cent levy on residential purchases.

With a majority of new mortgages in Hong Kong tied to Hibor, the city's homeowners face an unfamiliar prospect - rising loan repayment costs. The Hong Kong Monetary Authority increased its base rate for the second time in a decade on Thursday after the Federal Reserve lifted borrowing costs, while Fed officials moved their 2017 rate path projections to three hikes from two.

The International Monetary Fund warned this month that a faster pace of interest-rate increases in the US could threaten Hong Kong's economy due to stretched property valuations and high household debt with floating-rate mortgages.

Developers can also no longer rely on selling to mainland Chinese investors from across the border after the tax on non-residents' purchases doubled last month to 30 per cent.

Hong Kong effectively imports US monetary policy thanks to a currency peg to the greenback. That meant the city enjoyed ultra-low borrowing costs since the global financial crisis, helping to fuel a 155 per cent surge in home prices from the start of 2009.

There is little sign of panic in the property market just yet. The Centaline gauge of secondary home prices rose 0.3 per cent in the week through Dec 4 to its highest level in 14 months. The one-month Hibor, at 0.66 per cent, is still low relative to pre-2008 levels.

Still, where property stocks go, residential prices usually follow, as the chart below shows. A rally by the Hang Seng gauge of real estate shares earlier this year foreshadowed a recovery in the physical market.

BLOOMBERG