Photographer: Xaume Olleros/Bloomberg

Hong Kong Faces Housing Risks as Fed Tightening Looms, IMF Says

Stretched property valuations mean Hong Kong’s economy is vulnerable if interest rates rise faster than expected, the International Monetary Fund said.

In its annual assessment of the Asian financial hub, the IMF identified three main risks -- rising interest rates and potential global market volatility, China-linked stress, and a possible downturn in the property market.

With the U.S. Federal Reserve tipped to raise interest rates next week for only the second time in a decade, the higher borrowing costs will automatically flow through to Hong Kong, which effectively imports U.S. monetary policy because its currency is pegged to the greenback.

"A steeper-than-expected U.S. rate cycle or tightening of global financial conditions may have a bigger-than-usual adverse impact against a backdrop of high household debt with floating-rate mortgages," the IMF said in its report, known as the Article IV Consultation.

Hong Kong’s government moved suddenly last month to cool prices in the world’s least affordable property market, raising stamp duties for all except first-time local buyers. The property market peaked in September 2015, before global economic uncertainty and slowing demand from mainland buyers sent prices lower for a while. Since March, prices inched back to near record levels by early November.

Economic Risk

"With stretched valuations, there is the risk of an accelerated price adjustment should interest rates rise faster than expected," the IMF report added. "Although the financial system would be resilient to such an adjustment, there is a risk to the real economy from an adverse spiral of negative wealth effects, lower collateral values, slower credit growth, and weaker household and corporate spending."

The Washington-based fund also flagged risks from market volatility linked to U.K. and European banks, given Hong Kong’s role as a major base for global lenders, and highlighted the risk of exposure to China’s slowing economy.

Hong Kong’s economy has proved more resilient than many feared, shaking off a contraction at the start of the year as a steady jobs market underpinned demand. Exports also improved along with the stabilization in regional trade.

The IMF expects Hong Kong to grow by around 1.5 percent in 2016 and 1.9 percent next year.

— With assistance by Kana Nishizawa

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