Mortgage rates in Hong Kong, which have jumped nearly 200 basis points (bps) over the last six months, could rise to as much as 4.5 percent by the end of 2012, according to Barclays Capital, making it much harder for first-time homebuyers to enter the market.
Already, the bank estimates that first-time buyers need to pay nearly 47 percent of their household income in mortgage payments. The rising rates are likely to stall new purchases as well as purchases from people wanting to upgrade, Andrew Lawrence, director of property research at Barclays Capital, told CNBC.
“People who have got existing mortgages are on a still relatively low rate, but if they should want to move today, they're now going to have to pay much higher mortgage rates, so that's going to be a massive disincentive for buyers,” Lawrence said.
Earlier this year, Barclays predicted that Hong Kong property prices could fall 25-30 percent by 2013. Lawrence said he’s sticking by that view and that rising mortgage rates will “take out much of the bubble since 2007.”
Lawrence believes depositors are shifting out of the Hong Kong dollar and into the Chinese yuan, largely as a result of the Federal Reserve’s policy of competitive devaluation of the U.S. dollar. According to him, that draining of Hong Kong dollar liquidity is driving up interest rates in the territory.
Lawrence said he expects a continued slow-down in transaction volume for Hong Kong’s property market. The number of sale and purchase agreements for all building units received in August decreased 56.6 percent compared with the same period last year, according to figures from the territory’s registry.
Last week, the Secretary for Development Carrie Lam announced that the government wouldn’t hold any land auctions between October and December due to falling demand from developers.
While some property analysts have interpreted the move as government support for the property market, Lawrence doesn’t agree.
“(The government) is still committed to the 20,000 private units that it expects to deliver, and we would not be surprised for the Chief Executive to announce that we're going to see increased land supply, but combined into a subsidized housing program,” Lawrence said.
He cautioned that an increase in land supply and a government policy towards ramping up subsidized housing would be negative for the city’s property developers.
The developers most vulnerable at the moment, according to Barclays, are Midland Realty , Henderson Land and Sino Land . Barclays has an underweight rating on the first two developers and is neutral on the third.