As a revitalized US dollar hits the highest level in more than a year, it is not simply emerging markets that are grappling with the fallout. A booming Hong Kong property market is at risk.
The Hong Kong Monetary Authority was forced to intervene and buy the local currency this week for the first time since May to prevent the breaking of a peg with the US dollar that has been in place since the 1980s.
With further rate rises from the Federal Reserve expected to support the US currency, few are ruling out further action from Hong Kong's de facto central bank, which has the effect of driving up the local interbank lending rate that is the basis for many mortgages in the semi-autonomous Chinese territory.
So far the effect on Hong Kong's residential property market, where spaces as small as 117 square feet have been sold for HK$2.28m (US$290,000) this year and average prices are up more than double digits, has been muted, but experts warn that the outlook for next year is becoming far less rosy.
"Hong Kong has the classic symptoms of what have caused many past financial crises: an overvalued property market and high debt, leaving the City vulnerable to an accelerated Fed hiking cycle," analysts at Nomura noted.
In the past week, a number of big banks in Hong Kong, including HSBC, have lifted rates on new mortgages. "Higher mortgage rates may result in a modest housing market correction in 2019," said Young Sun Kwon and Minoru Nogimori of Nomura.
While it may not have shown up fully in property prices yet, Hong Kong's stock market is already discounting a more testing outlook. Shares in large Hong Kong-focused developers have fallen this year, with Henderson Land Development down almost 12 percent, Sun Hun Kai 8 percent, Wheelock 7 percent and Great Eagle 5 percent.
Shareholders in local property developers are also worried about a proposal by Hong Kong's government in June to impose a tax on vacant homes in an attempt to prevent the hoarding of property and to free up housing supply.
"[Property] is a very important part of Hong Kong's economy, so the effect could be quite significant," said Rob Subbaraman, chief economist and head of global markets research for Asia ex-Japan at Nomura. Construction and real estate services combined account for about a tenth of gross domestic product, he added.
Some analysts, including those at Morgan Stanley, expect prime rates, which are set by the banks and are another pricing benchmark for Hong Kong mortgages alongside Hibor, to rise within the second half of this year for the first time in about a decade.
Ken Yeung, a strategist at Citigroup, said the increase in property prices in the first half has lifted the risk of a drop in the second half, and is forecasting a 7 percent correction in this period. Analysts at Bank of America Merrill Lynch expect a 10-20 per cent slump in values in 2019-20.
A survey by Demographia, the urban public policy group, found, for the eighth year in a row, that Hong Kong is the least affordable property market in the world. Rental income has not kept pace with prices, weakening the investment case. According to CLSA, the residential rental yield is about 2.5 percent to 3 percent, down from 4.3 percent to 5 percent a decade ago.
"[Residential] property prices have pretty much tripled over the past decade and now look expensive relative to the Asian crisis, when they fell by a half from peak to trough," said Gareth Leather, analyst at Capital Economics. "They now look massively overvalued."
Other factors that have supported Hong Kong's property market in the past are now also under threat.
Research by Colliers International, a property services company, shows the flow of Chinese capital being channelled into parts of Hong Kong's residential market has slowed. Chinese investment in Hong Kong residential sites in the first half of this year amounted to $835m compared with $7bn for the whole of last year.
"The Chinese government is discouraging speculation in real estate, mainly in the residential sector . . . it's affecting some of the developers who buy sites in Hong Kong," said Terence Tang, managing director of capital markets and investment services at Colliers International Asia.
Still, some observers have pushed back on bleak forecasts for a price correction this year. Analysts at Morgan Stanley said that the recent tax measure on vacant properties, for example, was "unlikely to affect property prices unless market sentiment turns negative".
Elysia Tse, head of Asia Pacific research and strategy at LaSalle Investment Management, said that while residential home prices in Hong Kong "could be at risk, particularly when coupled with interest rate increases", she does not expect a substantial correction in the near-term.
Hong Kong's property bears have been disappointed during the past decade. But with the Chinese economy slowing and the US dollar advancing, 2019 could be the year that changes.
Investors might be more alert to signs of a slowdown in the world's least affordable property market.
More from the Financial Times: l
Currency pressure forces Hong Kong and Indonesia into action l
Hong Kong journalists' club in free speech dispute l
Ripple and Swift slug it out over cross-border payments