HKMA base rate hike puts H2 residential sales under pressure

Higher prime rates by banks could raise mortgage costs, CBRE said.

Hong Kong’s residential property market could see slower transaction activity in the second half (H2) if local banks raise their prime rates following the latest base rate increase.

“We believe banks are highly likely to adjust prime rates upwards, which would directly increase the mortgage rate ceiling for most H-plan mortgages,” said Hannah Jeong, head of valuation and advisory services at CBRE Hong Kong.

Should this occur, borrowing costs for homebuyers are also expected to rise, Jeong added.

The consultancy maintained its forecast for Hong Kong residential prices to rise 10% in the year.

The forecast comes as the Hong Kong Monetary Authority raised the base rate by 25 basis points to 4.25%, following a similar increase in the US federal funds rate.

The base rate is used as the foundation for calculating discount rates for repurchase transactions through the authority’s discount window.  

CBRE said the market improved significantly in H1, with prices and activity showing signs of bottoming out, but expects H2 to enter a consolidation phase.

Jeong also cited tighter mainland China capital controls as another factor that could weigh on buyer sentiment by moderating investment demand and cross-border capital inflows into the housing market.

“That said, if local banks choose not to adjust prime rates, the impact of the HKMA move on mortgage affordability would be limited,” she added.

Elliott Hau, head of financing valuation at Colliers, meanwhile, expects the immediate impact of the rate increase on the residential market to remain relatively mild, saying the move had largely been anticipated.

“The market has been gradually pricing in the likelihood of further rate hikes for some time, and the effect has already been reflected in recent transaction activity,” Hau said.

Residential transaction volume fell from 7,650 deals in June to 4,019 in August, according to Colliers.

“As the move was widely anticipated by the market, we expect its immediate impact on Hong Kong’s residential property market to remain relatively mild,” Hau added.

Colliers said higher borrowing costs could make owner-occupiers and investors more cautious in the short term, whilst a prolonged period of elevated rates could divert capital into alternative investment products.

The consultancy maintained its forecast for residential property prices to increase by 8% to 10% for the full year.