Hong Kong property faces new threat as banks squeezed on rates

[HONG KONG] Crunch the math behind Hong Kong's mortgage payments, and you'll spot signs of a potential hike in a rate that's key for the housing market.

That's the prime rate, which is individually set by banks. This is how home loans offered by banks commonly work in Hong Kong: you pay a floating rate that's equal to a spread on top of the one-month interbank rate known as Hibor, but that payment is capped by a rate that's equal to the prime rate minus a spread.

What's happening now is that as Hibor surged, the floating rate is starting to run into the cap, giving banks the incentive to raise the prime rate for the first time since 2006.

Cracks are already starting to appear in the world's least affordable housing market, even as the commercial property sector remains hot.

A gauge of home prices posted its biggest weekly drop since January at the end of October, and transactions have declined recently.

While analysts say ample liquidity may keep banks from raising the prime rate for now, the chance of a hike is increasing, especially with the Federal Reserve expected to lift rates next month. Under a currency peg, Hong Kong has little choice but to import US monetary policy.

"Secondary market transactions have started falling already," said Carie Li, an economist at OCBC Wing Hang Bank in Hong Kong. "The entire housing market may start to be affected from mid-2018, when the prime rate will have been raised. Because developers' mortgages are based on the prime rate, at that time those won't be as attractive, so the effect will be more obvious."

With its cage homes, car-size apartments and US$664,300 parking spaces, Hong Kong has become a notorious symbol of asset bubbles fueled by global monetary easing. 

Home prices have tripled since the 2008 financial crisis as low borrowing costs and demand for property by wealthy mainland Chinese countered government efforts to cool the real estate sector.

Hong Kong's interbank rates have surged since mid-September, with the one-month Hibor reaching a nine-year high last week, amid heavy demand for first-time share sales, expectations for further US tightening and debt sales by the local monetary authority.

Since mid-2014, at least three-quarters of new mortgages each month have been priced based on Hibor, Hong Kong Monetary Authority data show.  While each bank has its own prime rate, they tend to move in tandem. The rate offered by HSBC Holdings, the city's largest mortgage lender, is 5 per cent. HSBC didn't immediately comment, while Standard Chartered Plc declined to comment.

BOC Hong Kong Holdings, the second-biggest, said it will monitor market developments closely and keep mortgage rates under review.

Local home owners don't have to fret just yet. Plentiful liquidity and intense competition for mortgages will keep banks from raising the prime rate for now. But if Hibor climbs above 1 per cent, the likelihood of a hike will be much higher, according to OCBC Wing Hang's Li and Ivy Wong, managing director at Centaline Mortgage Broker Ltd.

"Banks may be afraid that if they raise the prime rate, they won't be able to compete," Ms Wong said. But when that rate starts rising, "psychologically, the effect will be more obvious because that will make people feel that the rate hike cycle has officially started."

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