Rate rise expectations mount in Hong Kong property market following Fed chief’s comments

Recent comments by Federal Reserve Chair Kevin Warsh have sparked growing expectations of a quarter-percentage-point interest rate hike in the United States, affecting the Hong Kong property market. Following his remarks at the Jackson Hole economic symposium, the CME FedWatch tool showed a doubling of US rate rise expectations for the month, with a 60% likelihood now priced in.

However, Knight Frank cautioned that local banks in Hong Kong are unlikely to increase the prime rate in the near term, projecting it would remain unchanged or rise by a maximum of 0.125%. The prime lending rate, which serves as a key reference for mortgage pricing, remains influential for borrowing costs.

Analysts noted that more homebuyers are now choosing fixed-rate mortgages to protect themselves from potential rate hikes. Interest rates on these mortgages remain stable even if the Hibor or prime rate rises. In line with the Linked Exchange Rate System, Hong Kong's monetary policy has followed the Fed since 1983.

Knight Frank's director, Esther Liu, suggested that local banks may only follow suit with a prime rate hike after consecutive Fed rate increases or a significant increase in funding costs. Currently, the prime rate caps mortgage effective rates at 3.25%. Even with some banks raising fixed-rate mortgages by 0.25% to 2.93%, mortgage financing costs are expected to remain relatively stable.

The Hong Kong Monetary Authority's residential mortgage survey, released on Monday, revealed that the percentage of fixed-rate mortgages approved in July reached an eight-year high of 34.1%, a 9-point increase from the previous month. Market expectations of an imminent US interest rate hike, coupled with concerns about Hong Kong banks following suit, have prompted buyers to opt for fixed-rate mortgages more frequently.

Mortgage referral brokerage firm StarPro Agency's CEO, Raymond Chong, attributed this trend to marketing campaigns encouraging borrowers to take advantage of low interest rates before they rise. As a result, homeowners may have accelerated mortgage refinancing, with the share of fixed-rate mortgages among new mortgages likely to have peaked above 40% in the previous month.

Among the three banks offering fixed-rate mortgages in Hong Kong, HSBC is the only one to have extended the application deadline until the end of the year. HSBC recently raised the fixed interest rate for new applications by 0.2 percentage points to 2.93%, indicating that banks are considering the associated costs. The one-month Hibor rose to a two-month high of 2.85% on Monday, reflecting increased borrowing costs for banks in mortgage lending.