Prime rate hike likely to take effect in Q4

Analysts waved off concerns that interest rates will immediately rise following the Fed’s tightening policies.

Analysts are allaying fears of immediate prime rate hike and its expected impact on the heated housing market as higher interest rates are not expected to kick into effect until Q4 at the earliest and Q12019 at the latest, according to Bank of America Merrill Lynch.

This comes as Hong Kong's linked currency to the USD binds it to the same fate as the Fed plans to tighten monetary policy this year. 

The HKD has also fallen to its lowest point in thirty years with BofAML estimating a breach of the 7.85 band in Q2. This may then prompt the HKMA to intervene by withdrawing $80b through market operations.

“1M HIBOR will need to be between 1.5% and 2.0% before the Prime Rate increases for the first time since the global financial crisis. It is possible for HKD rates to stay persistently below US rates when USD/HKD stabilises near 7.85,” according to bank’s projections.

BofAML notes that any correction in property prices will likely be shallow as the prime rate increase is likely to be gradual even if the US will move more aggressively.

Hong Kong’s property market is also insulated by a robust home supply pipeline, low-loan-to-value ratios at 50-60% and strong holding power as 66% of owners-occupiers had no mortgages of 2016.

“As we now do not expect any Prime rate hike to take place until 4Q18 at the earliest, we revise up our HK property price assumptions from 0-5% to +5% in 2018. We continue to project a 15% correction in 2019-20 as interest rates rise and a positive carry environment ends,” BofAML added.