From 2009 to 2015, Hong Kong experienced very low and stable interest rates. And while official rates have since started to climb, mortgage lenders have managed to absorb the upward pressure. As the US Fed raises its rates again, and as the Hong Kong dollar threatens the upper bounds of its peg, that buffer is bound to give way. When it does, can we expect it to be enough to cool the Hong Kong mortgage market?
Rising interest rates could impact mortgage demand in two ways.
From an investor’s point of view, rising rates lift the benchmark achievable on risk-free or low-risk, interest-paying vehicles, and in doing so, could shift demand away from property. While from a homebuyer’s point of view, rising rates lift the cost of a mortgage, which could make continued renting more attractive.
A long history of flat interest rates means we have to look at market-driven rising costs as a proxy, and doing so over the last three years reveals a market that’s apparently price inelastic. Of course, rising demand can cause rising prices, but in a more price sensitive market, we might expect higher prices to be followed by falling demand and vice versa. However, we’ve seen prices and inquiry volumes move together in 9 out of the last 12 quarters.
To me, this suggests the marginally higher interest rates we expect will have a limited impact on mortgage demand in the short term. That said, an HKMA study did find that rising mortgage costs have a drag effect on consumer consumption in the long run. So, with discretionary spending thought to be behind the recent revival in credit card balances, if interest rates do rise, we might expect a return to the sub-inflationary growth environment that characterized 2016 and most of 2017.
And what about homeowners already paying down a mortgage — could a rise in rates make any of those mortgages unaffordable and force more properties onto the market? It’s unlikely. In a study we carried out late last year as interest rates first started to rise, we found that 14 out of 15 mortgage holders could, in a pinch, cover a 75 basis point increase in mortgage rates without increasing their total monthly credit repayments, simply by moving to minimum payment on their credit cards. And just because the 15th mortgage holder couldn’t, it doesn’t mean they couldn’t absorb the cost from elsewhere in their budgets.
In sum, while rising interest rates are expected to finally start flowing through to the end borrower, rates will remain relatively low, and the impact to investors, lenders and borrowers is expected to be minimal in the short and medium term.
For more insights into the Hong Kong consumer credit market, read TransUnion’s latest quarterly Industry Insights Report and other articles here.