Hong Kong's Surging Dollar Sends a Warning on Housing Market

(Bloomberg) -- Surging interbank rates. A shock jump in the currency. Hong Kong’s decade-long liquidity party suddenly appears to be ending, and that can only be bad news for its expensive property market.

The one-month rate known as Hibor rose 28 basis points on Monday, the most since December 2008. That followed the biggest jump in the Hong Kong dollar in 15 years at the end of last week. The chance of local banks raising the so-called prime rate, which caps the cost of some mortgages, is “extremely high,” Financial Secretary Paul Chan said. That hasn’t happened since 2006.

A currency peg with the U.S., open financial borders and a booming economy meant Hong Kong property was one of the greatest beneficiaries of ultra-low lending costs in the wake of the global financial crisis. Home prices rose more than 170 percent in the past decade making the city the world’s least affordable. Citigroup Inc. and CLSA Ltd. are among those warning of a reversal on expectations that mortgage servicing costs will rise.

“The market has underestimated the pace of interest rate increases in Hong Kong,” said Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets Hong Kong Ltd. This “will bring pressure to the property market and leveraged home buyers.”

After trading at the weak end of the band for months, prompting repeated interventions by the city’s de facto central bank, the Hong Kong dollar rocketed into the stronger half of the spectrum on Friday. The currency rose as much as 0.17 percent Monday before trading little changed at 7.8116 per dollar at 2:03 p.m.

Hong Kong's Surging Dollar Sends a Warning on Housing Market

The one-month Hibor rose to 2.16929 percent, its highest in almost a decade and almost four times the 0.55 percent level it was a year ago. A vanishing spread with U.S. Libor is making a previously profitable trade of selling Hong Kong dollars to buy higher yielding U.S. assets less appealing.

The currency’s one-week forward points, an indicator of cash supply in the foreign-exchange market, touched the highest level since October 2007 on Monday before paring gains. One-year interest-rate swaps, which reflect the market outlook for Hong Kong dollar funding costs, were near the highest level in nearly a decade.

“The short-Hong Kong dollar carry trade has come to an end,” said Ken Peng, an investment strategist at Citi Private Bank in Hong Kong. “Friday’s move suggests borrowing costs in Hong Kong have tightened a lot and will tighten further.”

The Hong Kong Monetary Authority said in emailed comments that while it didn’t want to comment on Friday’s movement in the currency, “market participants generally view the elevated interbank interest rates as a contributing factor.”

Price Discounts

While residential prices in Hong Kong’s secondary market have climbed 16 percent over the past 12 months, according to Centaline Property Agency, some developers are offloading apartments at discounts and others aren’t providing mortgages due to concern that rising borrowing costs may increase defaults.

Vanke Property Overseas Ltd. is selling apartments at a project in Tuen Mun for as little as HK$9,878 ($1,265) per square foot, the lowest price in the primary market in about two years, according to local media reports.

A “fairly dramatic” weakening in sentiment means prices are set to decline over the next three months and then stagnate, according to the Royal Institute of Chartered Surveyors, which cited a survey of professionals in the field.

Predicting declines in Hong Kong’s property market hasn’t been a profitable exercise in the past, with a home-price slump in 2015-2016 quickly followed by record highs. But a rising prime rate could change the dynamic of demand for the city’s housing.

“We expect banks to hike prime rate twice this year by a total of 50 basis points, as Hibor rises with a shrinking liquidity pool and Fed hikes,” said Frank Lee, acting chief investment officer for North Asia at DBS Bank (HK) Ltd. “It will hurt property market sentiment.”

©2018 Bloomberg L.P.