The U.S. Federal Reserve has announced a quarter-point interest rate increase, dashing earlier optimism among market commentators. The move came sooner than many had expected, and with another quarter-point rise anticipated before the end of the year, Hong Kong is widely expected to follow suit. Analysts say the additional pressure could prove to be the final blow for the city’s property market.
Since July, market sentiment has weakened further following Beijing’s announcement of a tax on mainland Chinese residents investing in Hong Kong property and securities. The impact has been compounded by new difficulties in opening accounts for fresh capital inflows, effectively cutting off a key source of funding and leaving the market in a semi-paralyzed state.
The Hong Kong Monetary Authority has also raised its base rate to 4.25%, increasing expectations that local banks will follow. Following the U.S. rate hike, three-month U.S. dollar fixed deposit rates climbed to 3.5%, and could rise to around 3.7% if another increase is delivered later this year. At such levels, rental yields are increasingly insufficient to justify property purchases as an investment.
The latest U.S. rate increase has undercut earlier forecasts that Hong Kong home prices could rise by 20% by year-end, as well as bullish projections from major securities firms. Many of those previously optimistic voices have since grown more cautious. While they once highlighted room for further price gains in new developments, they are now pointing instead to more restrained pricing by developers.
The current interest rate cycle appears to be firmly under way. Based on previous cycles, elevated rates could persist for at least two to three years, suggesting that Hong Kong’s property market may be entering a prolonged period of weakness.
