The impact of interest rate hike on property market

Yesterday Hong Kong just saw the first interest rate hike in 12 years finally despite it is the 8th hike in the U.S already. This first hike did not put much impact on the local stock market but there are more concern on the property market though.

Many experts related to the property market commented that the impact is minimal because the hike is merely 0.125% so the installment increment is just HK$60+ per every million dollar mortgage. That will translate into absolute dollars for an averaged size property around $300 per month and that should be well within the affordability. Therefore it will not bring much pressure on the property market even if a few more hikes are expected in the coming two years.

It is true that the increment on the installment amount does not and will not apply too much financial burden to existing flat owners especially to those whom became owners more than five years ago because the price of their properties have risen much already while on the other hand the outstanding loan reduced. Perhaps new owners are those most concerned.

However, the above opinion is one sided perspective only. The majority of property market, in term of quantity, is residential ones while this segment is also divided into two categories, in terms of purchase purpose, ie,, dwelling and investment. The above mentioned opinion is applicable mainly on the property owners with the former purchase purpose. Since their properties, most of the case the only one, are for own consumption and they need dwelling anyway disregard the rise of interest rate on their mortgage. They don't seem to be likely to sell their own dwellings even if there is a rather big hike in the interest rate in the future. The most possible extent of the impact is only on the people whom are currently thinking to buy their home and the increment on interest payment could likely make their purchase to be put aside. Yet there will not be a price pressure arising from a massive selling.

I think this is the rationale behind the opinion that those experts advocated the impact will be minimal. Nevertheless they ignored the view from the other category of residential owners with purchase purpose as investing. Their properties is for investment only and most likely it is only part of their investment portfolio which is constantly under review to see whether risk and return are in proper ratio. Hong Kong property market has an high degree of internationalization meaning apart from local people whom bought for own consumption as well as investment but there are also overseas owners purchased Hong Kong properties just for investment. Despite local buyers outnumbered overseas counterparts but the movement of the latter should not be underestimated especially in the luxury segment of the market.

The return of Hong Kong property investment sits around 2-3% only which is not particularly attractive especially after a consecutive 28 months upward on the price index. Investor owners, both local and overseas, mainly eye on the future appreciation on their properties rather than relying on the rental income due to the low return. Despite the forecast on continuous interest rate hike will not lead to a major correction but if the steam of the price appreciation is expected to lose somehow. The investment on Hong Kong property is no longer attractive considering the low return it can provide.

When the hope of further price appreciation becomes slimmer while the return is just 2-3%, it might trigger the smart money to look for safer place to put their investment on. Recently the yield of the 10Y U.S. Treasury Bill is 3.06% which is considered as a risk-free investment. The return of Hong Kong property investment is really unattractive considering the potential downward movement in case the Sino-U.S. trade conflict worsen in the future. Furthermore, the U.S. interest rate hike is yet at the end so the comparison starts to become against Hong Kong property.

In an highly open economy like Hong Kong, price of different investments is driven not only by local factors so being an investor in Hong Kong market should review the situation with international perspective. Local investors should put them into their overseas counterparts' shoe to see what they think and how they want to allocate their assets globally. Local investors should have a view on when there is a change in their existing allocation in Hong Kong market then what likely the outcome is.

The impact on interest rate hike could mean far more affection than just installment increment.