As a revitalized US dollar wounds the highest level in more than a year, it is not simply emerging stores that are grappling with the fallout. A booming Hong Kong holdings market is at risk.
The Hong Kong Monetary Authority was forced to interfere and buy the local currency this week for the first time since May to obstruct the breaking of a peg with the US dollar that has been in place since the 1980s.
With support rate rises from the Federal Reserve expected to support the US currency, few are ordinance out further action from Hong Kong’s de facto central bank, which has the carry out of driving up the local interbank lending rate that is the basis for various mortgages in the semi-autonomous Chinese territory.
Receive 4 weeks of unlimited digital access to the Fiscal Times for just $1.
So far the effect on Hong Kong’s residential property vend, where spaces as small as 117 square feet have been exchanged for HK$2.28m (US$290,000) this year and average prices are up more than double digits, has been turn down, but experts warn that the outlook for next year is becoming far less ruddy.
“Hong Kong has the classic symptoms of what have caused assorted past financial crises: an overvalued property market and high accountability, leaving the City vulnerable to an accelerated Fed hiking cycle,” analysts at Nomura notable.
In the past week, a number of big banks in Hong Kong, including HSBC, from lifted rates on new mortgages. “Higher mortgage rates may result in a unimportunate housing market correction in 2019,” said Young Sun Kwon and Minoru Nogimori of Nomura.
While it may not should prefer to shown up fully in property prices yet, Hong Kong’s stock trade in is already discounting a more testing outlook. Shares in large Hong Kong-focused developers press fallen this year, with Henderson Land Development down nearly 12 percent, Sun Hun Kai 8 percent, Wheelock 7 percent and Great Eagle 5 percent.
Shareholders in town property developers are also worried about a proposal by Hong Kong’s command in June to impose a tax on vacant homes in an attempt to prevent the hoarding of mark and to free up housing supply.
“[Property] is a very important part of Hong Kong’s conciseness, so the effect could be quite significant,” said Rob Subbaraman, chief economist and chairman of global markets research for Asia ex-Japan at Nomura. Construction and legitimate estate services combined account for about a tenth of gross autochthonous product, he added.
Some analysts, including those at Morgan Stanley, upon prime rates, which are set by the banks and are another pricing benchmark for Hong Kong mortgages alongside Hibor, to incite within the second half of this year for the first time in in all directions a decade.
Ken Yeung, a strategist at Citigroup, said the increase in property evaluates in the first half has lifted the risk of a drop in the second half, and is vaticination a 7 percent correction in this period. Analysts at Bank of America Merrill Lynch wait for a 10-20 per cent slump in values in 2019-20.
A survey by Demographia, the urban patent policy group, found, for the eighth year in a row, that Hong Kong is the least affordable possessions market in the world. Rental income has not kept pace with assays, weakening the investment case. According to CLSA, the residential rental surrender is about 2.5 percent to 3 percent, down from 4.3 percent to 5 percent a decade ago.
“[Residential] attribute prices have pretty much tripled over the past decade and now look overpriced relative to the Asian crisis, when they fell by a half from tip to trough,” said Gareth Leather, analyst at Capital Economics. “They now look massively overvalued.”
Other elements that have supported Hong Kong’s property market in the times gone by are now also under threat.
Research by Colliers International, a property overhauls company, shows the flow of Chinese capital being channelled into constituents of Hong Kong’s residential market has slowed. Chinese investment in Hong Kong residential situates in the first half of this year amounted to $835m compared with $7bn for the aggregate of last year.
“The Chinese government is discouraging speculation in real holdings, mainly in the residential sector . . . it’s affecting some of the developers who buy plats in Hong Kong,” said Terence Tang, managing director of top markets and investment services at Colliers International Asia.
Still, some lookers-on have pushed back on bleak forecasts for a price correction this year. Analysts at Morgan Stanley ordered that the recent tax measure on vacant properties, for example, was “unlikely to fake property prices unless market sentiment turns negative”.
Elysia Tse, chairlady of Asia Pacific research and strategy at LaSalle Investment Management, demanded that while residential home prices in Hong Kong “could be at risk, unusually when coupled with interest rate increases”, she does not hope for a substantial correction in the near-term.
Hong Kong’s property bears deliver been disappointed during the past decade. But with the Chinese compactness slowing and the US dollar advancing, 2019 could be the year that varies.
Investors might be more alert to signs of a slowdown in the world’s smidgin affordable property market.
More from the Financial Times: l
Currency on forces Hong Kong and Indonesia into action l
Hong Kong gentlemen’ club in free speech dispute l
Ripple and Swift slug it out over and beyond cross-border payments