Real Estate

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Hong Kong's one-month interbank rate has reached its highest level since the global financial crisis. But don't expect the city's real estate prices to halt their spiral anytime soon, whatever the International Monetary Fund may say.

Cheap Money
The current spike in Hibor is unlikely to derail the city's real estate rally
Source: Bloomberg
Note: Data indexed for comparability.

Blame banks and property developers.

Around 94 percent of mortgages in the world's least affordable property market are tied to the Hong Kong interbank offered rate, so the surge above 1 percent will cause some pain.

It will be limited, though. Borrowing costs are capped by a formula linked to banks' prime or so-called best lending rate, which hasn't been raised for more than a decade. The prime rate stands at 5 percent at HSBC Holdings Plc, Hong Kong's biggest bank.

A typical Hong Kong home loan may be priced at Hibor plus 1.4 percent, for example, with a ceiling at prime minus 2.85 percent. Three months ago, the one-month rate stood at about 0.4 percent, translating to a mortgage cost of 1.8 percent. With Hibor at 1 percent, a borrower on that deal has already run into the protection of the cap and can expect to pay 2.15 percent rather than the interbank-related cost of 2.4 percent.

An increase in the prime rate is a long way off. One reason is that Hong Kong's banking system is still flush with deposits. The flood of liquidity into the city since the financial crisis has propelled banks into a struggle for market share, pushing mortgage costs lower and making the "best" lending rate a misnomer.

The loan-to-deposit ratio of HSBC's Asian arm is 63 percent, according to Bloomberg Intelligence. That compares with 71 percent for the London-based bank as a whole and an average of 99 percent for 200 lenders globally, according to data compiled by Bloomberg. HSBC, its subsidiary Hang Seng Bank Ltd. and Bank of China Ltd. unit BOC Hong Kong Holdings Ltd. between them hold about 40 percent of the city's deposits, or more than $600 billion. 

A second reason is Hong Kong's currency peg to the dollar, which means that the prime rate tracks benchmark rates in the U.S. -- but with a lag.

In the last U.S. tightening cycle from 2004 to 2006, the Federal Reserve raised its benchmark by 175 basis points before HSBC and its peers began increasing their prime rates, Bloomberg Intelligence analyst Francis Chan points out.

Since the end of 2015, the Fed has increased borrowing costs four times, by a total of 100 basis points. While the base rate set by the Hong Kong Monetary Authority has matched each increase, HSBC and other banks have kept their prime rates unchanged.

The gap between Hong Kong's base and prime rates remains wider than its historical average. Between 2000 and 2007, that difference ranged from 100 to 250 basis points, before blowing out to 450 points as U.S. borrowing costs collapsed during the crisis. It now stands at 350 basis points.

Spread It Thick
The gap between Hong Kong's prime and base rates remains wide relative to history
Source: Bloomberg

By that yardstick, U.S. borrowing costs may rise at least another full percentage point before we see Hong Kong's prime rates move.

While that benchmark stays low, money stays cheap. And property developers are always happy to give buyers of new homes a helping hand to skirt HKMA limits on borrowing from banks. 

Higher Hibor rates won't make developer loans more expensive because they are based on prime, according to Nomura Holdings Inc. analyst Joyce Kwock. For instance, Sun Hung Kai Properties Ltd. is offering financing at prime minus 1.5 percent for the first two years at its Park Yoho Genova development, Nomura notes.

Of course, if Hibor rises so high that banks aren't making much money from the spread between the prime and money-market rates, they may start rethinking their ultra-low mortgage offers. 

Even then, though, prices may stay buoyant. Supply has failed to keep pace with demand, especially from the increasing number of mainland Chinese who are moving to Hong Kong. The bank of mom and dad also remains a potent source of buying power for young people who would otherwise struggle to get on the ladder.

Ultimately, this week's Hibor spike is a reminder of how unusually low borrowing costs have been -- and remain. Previous shakeouts in Hong Kong property have happened when rates were much higher: One-month Hibor jumped above 20 percent during the 1997-98 Asian financial crisis, when home prices slumped by more than half, while the prime rate peaked at more than 10 percent.

Rising interbank rates are something to watch, but hardly an omen of doom for Hong Kong property, yet.

 

 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net