Investors may remain on the sidelines of Hong Kong’s property market because banks’ prime-rate cuts thus far are insufficient to serve as a catalyst and home prices are set to continue their slump. The current interest rate is not a turnaround, adding that yields for 10- to 30-year US treasury bonds have yet to drop. I would not say an interest-rate-cut cycle has begun.
Property investments are long-term, but the current interest-rate cut is more likely short-term, therefore, we won’t be seeing many investors entering the market.
On September 19, the Hong Kong Monetary Authority (HKMA) began a policy easing cycle by following the US Federal Reserve’s half-percentage point cut of its base interest rate, the first reduction in four years. Hong Kong’s de facto central bank adjusts its own policy based on what the Fed does to keep the local currency’s peg to the US dollar.
The cut paved the way for Hong Kong’s commercial banks to trim their rates by a quarter point for the first time in nearly five years, which in turn translates into savings for borrowers whose loans are tied to prime rates.
For example, on a 30-year, HK$5 million loan priced at prime minus 1.75 per cent, the reduction cuts the mortgage rate to 3.875 per cent, meaning the monthly payment drops by HK$720 to HK$23,512.
To investors, the difference [after the rate cut] is subtle, since the borrowing ratios are relatively lower. On a HK$1 million, 30-year loan priced at prime minus 1.75 per cent, the monthly payment drops by only HK$144 to HK$4,702.
The one-month Hong Kong interbank offered rate, or Hibor, a benchmark for mortgage loans, would have to halve to get the attention of investors. The Hibor rose to 4.187 per cent on Friday after falling to a 16-month low of 3.614 per cent a week ago after the HKMA policy move. Unless Hibor drops to around 2 per cent, property investment will not be attractive. But that won’t happen for a long time to come.
Investor confidence in the property market will take time to restore, as we don’t see any major factors that will lead to a rebound. The city’s lived-in home prices in August sank 1.72 per cent month on month to an index reading of 292.1, the fourth straight monthly decline and the lowest reading since the gauge hit 287.6 in August 2016, according to the Rating and Valuation Department. Lived-in home prices have dropped 13.32 per cent year on year and 6.17 per cent since the end of 2023.
Although we won’t be seeing a bigger slump, prices have already dropped nearly 30 per cent from their peak, and investors have had low liquidity in a depressed property market over the past three years. Residential rents, on the other hand, jumped to the fourth-highest level on record last month.
The official index of residential rents in the city rose 1.13 per cent to 197.5 in August from July’s reading of 195.3, official data showed. Rents have surged 6.8 per cent from a year earlier, which makes rental yields more attractive.
Some cash-rich investors with their own investment strategies will still choose to enter the market. For example, an investor paid HK$89 million on Saturday for 12 units, including six three-bedroom flats, in One Jardine’s Lookout in Happy Valley, developed by Emperor International.
Rental yields are currently at 3 to 4 per cent, on par with yields from long-term US treasury bonds. But it does not cancel out the factor that capital value is dropping as residential prices are under pressure. There are a lot of investment vehicles out there that offer current rates of return, some even higher with greater liquidity.
Rental returns still have room to increase as rents will likely continue to rise due to more demand from people coming into Hong Kong in the near future, if the situation continues while US treasury bond rates remain at their current level, the property market will slowly gain back its attractiveness.
Comments