Hong Kong’s currency peg means homebuyers are in for a potential interest rate shock, according to Nomura analysts.
The Japanese bank has forecasts 350 basis points (bp) of further US Federal Reserve interest rate rises by July 2023.
Under Hong Kong’s linked exchange rate system, once the weak side of the USD/HKD convertibility undertaking is reached, the Chinese territory’s money base will shrink and Hong Kong Interbank Offered Rate (HIBOR), interest rates will rise.
HIBOR is the benchmark interest rate, stated in Hong Kong dollars, for lending between banks within the Hong Kong market.
“However, the transmission from higher HIBOR rates to an increase in the banking sector’s cost of funding to higher mortgage lending rates will be slow,” Nomura analysts said.
The Hong Kong Monetary Authority (HKMA), the de facto central bank, has nearly HK$1.2 trillion of exchange fund bills outstanding that it could purchase from banks to smooth liquidity and avoid a sudden rise in bank funding costs, Nomura said.
Between 2015 and 2018, the Fed raised rates by 225bp, but Hong Kong’s prime mortgage lending rate rose over this period by only 10bp to 5.1%.
“That said, we expect this Fed rate cycle to be faster and larger and, as the HKMA warned in its latest Monetary and Financial Stability report, housing affordability is already highly stretched,” Nomura said.
The housing price-to-income ratio reached 19.8 in the fourth quarter of 2021, compared with the peak value of about 15 in 1997, analysts said, adding that the income-gearing ratio also reached 92.9%, well above the long-term average.
- George Russell