Photographer: Xaume Olleros/Bloomberg

Hong Kong Property Shares Turn Toxic as Mortgage Costs Spike

  • Gauge of real estate stocks falls most on Hang Seng Index
  • City’s key interbank rate climbs to highest since 2008

Hong Kong’s property developers are fast falling out of favor among investors as surging mortgage costs and punitive taxes threaten to choke home sales.

A gauge of real estate companies traded on the city’s stock market has tumbled 13 percent this quarter, with developers accounting for half of the biggest losers on the benchmark Hang Seng Index, which has fallen 5.3 percent. During the three-month period, a key interbank rate -- known as Hibor -- has doubled to an eight-year high, while the government also slapped a 15 percent levy on residential purchases.

With a majority of new mortgages in Hong Kong tied to Hibor, the city’s homeowners face an unfamiliar prospect -- rising loan repayment costs. The Hong Kong Monetary Authority increased its base rate for the second time in a decade on Thursday after the Federal Reserve lifted borrowing costs, while Fed officials moved their 2017 rate path projections to three hikes from two.

The International Monetary Fund warned this month that a faster pace of interest-rate increases in the U.S. could threaten Hong Kong’s economy due to stretched property valuations and high household debt with floating-rate mortgages.

The Hang Seng Properties Index plunged 2.6 percent to close at its lowest level in almost six months, with Hang Lung Properties Ltd. and New World Development Co. among the biggest losers. Link Real Estate Investment Trust slumped for a fourth day as U.S. Treasuries and China’s sovereign debt tumbled. Higher bond yields make dividend returns of REITs less attractive.

Hong Kong effectively imports U.S. monetary policy thanks to a currency peg to the greenback. That meant the city enjoyed ultra-low borrowing costs since the global financial crisis, helping to fuel a 155 percent surge in home prices from the start of 2009.

Foreigner Levy

An effective tax of 30 percent on a non-resident’s home purchases also makes the city’s private real estate less attractive to mainland Chinese investors seeking dollar assets as the yuan weakens.

There is little sign of panic in the property market just yet. The Centaline gauge of secondary home prices rose 0.3 percent in the week through Dec. 4 to its highest level in 14 months. The one-month Hibor, at 0.66 percent, is still low relative to pre-2008 levels.

Still, where property stocks go, residential prices usually follow, as the chart below shows. A rally by the Hang Seng gauge of real estate shares earlier this year foreshadowed a recovery in the physical market.
 

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