"John, do you think my family should enter the market? I heard that the United States has started to cut interest rates. Does that mean the property market will rebound?" A friend who has been in the middle class for ten years asked me in a tea restaurant last week. He has a down payment of 2 million, but he has been on the sidelines due to the wave of interest rate hikes in the past two years. He has seen property prices fall by 15-20% from their highs, and now he can no longer hold back.
This question is believed to be on the minds of many prospective buyers. Since 2022, the U.S. Federal Reserve has raised interest rates 11 times in a row, pushing interest rates from near zero to a 22-year high of 5.25-5.5%. As an economy under the linked exchange rate system, Hong Kong's interbank offered rate (HIBOR) and prime interest rate (P) have also risen, which has greatly increased the housing mortgage burden. However, as inflation falls and economic data weakens, the market generally expects that the global interest rate hike cycle has come to an end, and has even begun to discuss a timetable for interest rate cuts.
What exactly does this mean for the Hong Kong property market? Does this mean it’s time to “get on the bus”? This article will break down the real impact of the end of the interest rate hike cycle on the Hong Kong property market from three perspectives: interest rate trends, mortgage costs, and market supply and demand, and provide practical strategies for professional investors and car buyers.
The end of the global interest rate hike cycle: three major signals you need to know
U.S. inflation falls, the Fed turns dovish
Beginning in the second half of 2023, U.S. inflation data continued to fall. Core CPI fell to 3.2% from a high of 6.6%, still above the Fed's 2% target but with a clear downward trend. Federal Reserve Chairman Powell has hinted in many public speeches that the interest rate hike cycle may be over, and the market focus turns to "when to start cutting interest rates."
According to the CME FedWatch tool, the market expects the Federal Reserve to start cutting interest rates as soon as mid-2024, and may cut interest rates 3-4 times throughout the year, by 0.25% each time. This is a major positive signal for the Hong Kong property market.
:::tip Expert Opinion The Hong Kong banking system’s balances have long been at a low level (about HKD 50 billion), and coupled with the linked exchange rate system, Hong Kong dollar interest rates must follow the trend of the US dollar. Once the United States starts to cut interest rates, Hong Kong mortgage rates will fall simultaneously, directly reducing the cost of buying a home. :::
Hong Kong banks begin to "relax" mortgage discounts
In the past two years, Hong Kong banks have significantly tightened mortgage concessions in response to the interest rate hike environment. H is capped from P-2.5% to P-2%, and the cash rebate is reduced from 2% to 0.5-1%. But in 2024, some banks have begun to "relax" and re-launch more attractive mortgage plans.
For example, a large bank recently launched a mortgage plan of "H+1.3%, capped at P-2.25%" and provides a 1.5% cash rebate. This reflects the changes in banks’ expectations for future interest rate trends and is also a leading indicator of a recovery in the property market.
Property prices have been adjusted to a reasonable level
According to data from the Rating and Valuation Department, Hong Kong's private residential price index has dropped by about 15-20% from its high in 2021, and has fallen by more than 25% in some areas such as the New Territories. Calculated in terms of salable area, the current average price per square foot is approximately HK$12,000-15,000, which has returned to the level of 2019.
Comparing the rental return rate, the rental return rate of many housing estates has reached 3-3.5%, which is close to the historical average. Coupled with the expected fall in housing supply interest rates, the situation of "flat supply and over-renting" will reappear, attracting owner-occupiers and investment buyers to enter the market.
The real impact of the end of interest rate hike on different buyers
Car owners: The burden of housing payment will be greatly reduced
Take a HK$6 million car listing as an example. The down payment is 30% (1.8 million), the mortgage is 4.2 million, and the repayment period is 30 years. At the current effective interest rate of H at about 4.125%, the monthly payment is about HK$20,400.
If the interest rate drops back 1% to 3.125%, the monthly payment will drop to about HK$18,000, saving HK$2,400 per month and nearly HK$30,000 for the whole year. For car owners with a monthly income of 50,000 to 60,000 yuan, this is a considerable reduction.
:::highlight Insider Tip It is recommended that car buyers choose the 'H button' rather than the 'P button.' The H button follows the interbank offered rate, responding more quickly when the United States cuts interest rates; the P button is determined by the bank itself and adjusts more slowly. Currently, the cap for the H button is generally P-2% to P-2.5%, providing protection even if HIBOR rises sharply. :::
House-switchers: The gap in property prices has narrowed, making it easier to upgrade
During the property market correction in the past two years, large units generally experienced larger declines than smaller units. For example, a 500-foot unit may only fall by 10-15%, but an 800-foot unit may fall by 20-25%. This has narrowed the "property price gap" faced by home-swap buyers and reduced the cost of upgrading.
Suppose you currently own a two-bedroom unit with a market value of RMB 6 million and want to exchange it for a three-bedroom unit with a market value of RMB 10 million. During the peak period of the property market, the price difference between the two may reach 5 million; but now the price difference may only be 3.5-4 million. Coupled with the fall in interest rates, housing supply pressure has eased, making property replacement more feasible.
Professional investors: Increased rental return rate
For professional investors who hold multiple properties, the end of the interest rate hike cycle means two major benefits:
- Mortgage cost reduction: Suppose you hold 5 properties with a total mortgage amount of 20 million. For every 1% reduction in interest rates, you can save HK$200,000 in interest expenses per year.
- Rental return rate increased: After the adjustment of property prices, rents have been relatively stable, and the rental rate of return has increased from 2-2.5% to 3-3.5%, which is close to the time deposit interest rate, greatly increasing its attractiveness.
:::success Experts recommend Professional investors can consider the 'cash-out refinancing' strategy. When property prices adjust and valuations are lower, they can refinance to cash out funds and then reinvest in other properties or income-generating assets to leverage the effect. However, it is crucial to ensure stable cash flow to avoid the risk of default caused by short-term rental fluctuations. :::
Three major risks you must pay attention to before entering the market
Risk 1: There are variables in the interest rate cut schedule
While U.S. interest rate cuts are widely expected to begin in mid-2024, the actual timeline remains variable. If inflation rebounds and economic data is strong, the Fed could delay a rate cut or even raise rates again.
Hong Kong buyers should not "bet" on the timing of interest rate cuts, but should use "current interest rates" to calculate their affordability. If you are already struggling under current interest rates, even an interest rate cut in the future may not solve the problem.
Risk 2: Property market supply will increase significantly
According to data from the Transport and Housing Bureau, the supply of private housing in Hong Kong will reach 100,000 units in the next 3-4 years, a new high in recent years. Increased supply will put pressure on property prices, especially in the New Territories and some areas where new developments are concentrated.
:::warning Guide to Avoiding Pitfalls Buyers should avoid the mindset of 'chasing new developments.' Although new developments are fully equipped with facilities, they often come with higher premiums and the surrounding amenities are not yet established. In contrast, second-hand estates such as Taikoo Shing and Mei Foo Sun Chuen have well-developed facilities, convenient transportation, and current prices have already adjusted to a reasonable level, offering a higher cost-performance ratio. :::
Risk 3: Uncertain economic prospects
The pace of Hong Kong's economic recovery is slower than expected. Although the unemployment rate has fallen, consumer confidence remains weak. Coupled with external factors such as geopolitical risks and Sino-US relations, the economic outlook is uncertain.
Buyers should ensure they have adequate "safety cushions", including:
- At least 6-12 months of mortgage reserves
- Stable source of income
- Reserve funds to meet unexpected expenses (such as maintenance, rates and government rent, etc.)
Practical strategy: How to seize market entry opportunities at the end of interest rate hikes
Strategy 1: Lock in the Xunpan with "flat supply and over-rent"
At present, many housing estates have experienced a situation of "flat supply and over-renting". Taking City One, Shatin as an example, a 500-square-foot two-bedroom unit has a market price of about 5.5 million and a rent of about HK$15,000. If the down payment is 30% (1.65 million), the mortgage is 3.85 million, and the repayment period is 30 years, the monthly payment is about HK$18,700 (calculated at an interest rate of 4.125%).
Although the current payment is still slightly higher than the rent, once the interest rate drops by 1%, the payment will be reduced to approximately HK$16,500, truly achieving "equal payment and rent". This is a very attractive time to enter the market for owner-occupiers.
Strategy 2: Make good use of "mortgage insurance" to increase leverage
The Hong Kong Monetary Authority stipulates that properties with a value of less than 10 million can be borrowed at a maximum of 90% (mortgage insurance is required), and properties with a value of 10 to 15 million can be borrowed at a maximum of 80-90%. Making good use of mortgage insurance can lower the down payment threshold and get started early.
For example, for an 8 million property, if you borrow a 90% mortgage, the down payment is only 800,000 (plus a mortgage insurance premium of about 200,000, which can be included in the loan amount). Compared with the down payment of 3.2 million required to borrow a 60% mortgage, the threshold is significantly lower.
:::tip Experts remind Using mortgage insurance requires paying premiums, and the monthly payments will be higher. Buyers must ensure that their debt service ratio (DSR) meets requirements, generally not exceeding 50%. It is recommended to first use the bank's 'mortgage calculator' to assess their affordability. :::
Strategy 3: Enter the market in stages to reduce risks
If you have sufficient funds on hand but are worried about "buying the wrong market", you can consider the "staged market entry" strategy. For example, first buy a smaller unit for self-occupation or rent collection, and then consider adding more money after the market becomes more clear.
The benefits of doing this are:
- Reduce the risk of one-time investment
- You can actually experience the real estate market trends and accumulate experience
- If property prices continue to adjust, there will still be funds to "sell goods"
Summary: Opportunities and risks coexist, and preparation is the most important thing
The global interest rate hike cycle is coming to an end, which is indeed good news for the Hong Kong property market. The fall in interest rates will directly reduce the cost of housing, improve the affordability of buyers, and also help stimulate market transactions. Coupled with the fact that property prices have been adjusted to a more reasonable level and rental yields have increased, the situation of "flat supply and over-renting" will reappear, attracting owner-occupiers and investment buyers to enter the market.
But this does not mean that the property market will immediately "rebound". Factors such as increased supply, uncertain economic prospects, and uncertain interest rate cut schedules will still put pressure on the property market. Buyers must remain rational and carefully evaluate the timing of entering the market based on their own financial situation and needs.
Remember: buying a property is not a "bet" on the market, but a "count". As long as you make good financial planning and choose the right property, even if property prices fluctuate in the short term, it will still be a sound investment in the long run.
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