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Hong Kong House Prices May Fall 30% on Rates, Barclays Says

Hong Kong Housing Prices Likely to Drop 25-30%
Hong Kong housing prices are likely to drop by 25-30 percent as mortgage rates climb to 4-4.5 percent by the end of next year, Barclays Capital said. Photographer: Dale de la Rey/Bloomberg

Hong Kong home prices are likely to fall as much as 30 percent as banks increase mortgage rates, according to Barclays Capital Asia Ltd.

The “debt-fueled property price rally since mid-2007 is entering its last leg,” Andrew Lawrence and Jonathan Hsu, analysts at Barclays, wrote in a report today. “While we do not expect a near-term correction, rising mortgage rates hold the potential for a price correction into 2012, driven by reduced affordability and purchasing power for new buyers.”

Home prices will probably increase as much as 15 percent this year, before dropping 15 percent to 20 percent next year and declining by another 10 percent in 2013, the analysts wrote. Prices will sink as banks quadruple mortgage rates for new borrowers to more than 4 percent by the end of 2012 from as little as 1 percent now to boost lending margins, they wrote.

Hong Kong’s housing prices have surged more than 70 percent since the beginning of 2009 to the highest since 1997, according to Centaline Property Agency Ltd., as mortgage rates remained at record lows, the economy recovered and buyers from China increased. The city’s government, robbed of an independent interest-rate policy because of a currency pegged to the U.S. dollar, has kept its base rate at the record-low 0.5 percent since December 2008.

"Given our forecast that mortgage rates will reach 4-4.5 percent by end-2012, we consider a 25-30 percent price correction an increasing likelihood for the housing market," Barclays said.

Lending Rates

Standard Chartered Plc and BOC Hong Kong (Holdings) Ltd. are among lenders which raised mortgage rates in the city last month. Both banks increased the lending rate by between 10 and 20 basis points.

Increased mortgage rates will come as a "shock" to home buyers, Barclays said. "We suspect that with mortgage margins having been on a decline for 13 years, many home owners would not expect a sustained mortgage rise independently of a move in U.S. interest rates. This level of uncertainty would clearly negatively impact home buying confidence."

The number of home sales in Hong Kong surged 30 percent in February from the previous month, according to the Land Registry. The city is the world’s most expensive place to buy a home, according to London-based Savills Plc. If Hong Kong was a "property clock," the time is probably past nine o’clock, meaning there is still a quarter of the upwards cycle to come, David Edwards, regional director for LaSalle Investment Management, said in an interview in Beijing last month.

U.S. Rates

Property lending rates for existing borrowers may increase to as much as 2 percent by the end of next year as the U.S. Federal Reserve raises borrowing costs by 50 to 75 basis points, Barclays said.

Higher mortgage rates and Fed rate increases will start to start to feed into price reductions next year as low supply holds up prices this year, the analysts wrote. "The end result of the removal of this liquidity is likely to be a property price correction, reflecting our belief that property markets top out soon after liquidity has been most abundant."

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