Hong Kong pegs its currency to the U.S. dollar, so when the Federal Reserve starts hiking rates, borrowing costs in the city rise too.
The rental income may soon not be enough to cover the mortgage payments. Almost all of the city’s new loans are benchmarked against HIBOR, which has been hiking up.
Repair men are hard to schedule these days, as many catch the contagious omicron variant and take sick leave.
Maintenance costs are rising. Tenants are probably working from home, cooking, washing and cleaning a lot more than before Covid. Appliances break, creating additional costs that were more rare prior to the pandemic.
The rental yield stood at 2.4% at 2021 year-end, according to realtor Centaline Property Agency Ltd. That should cover the 1.6% mortgage rate you could get from HSBC Holdings Plc’s local subsidiary, Hang Seng Bank Ltd, which charges a 1.3 percentage-point premium over one-month HIBOR (The Hong Kong Interbank Offered Rate), but not for so long.
The average 30-year mortgage rate in the U.S. has reached almost 4.7%, the highest since December 2018. Fed fund futures are pricing in about 2 percentage points in rate hikes by year-end, so expect the cost of borrowing to rise in the near future.
By the end of the year, if the futures market is correct new owners will most likely earn negative carry for the first time since the collapse of Lehman Brothers in 2008. This will be a tough adjustment for the new landlords, as traditionally, real state is perceived as a profitable investment.
As the city enters its third month of soft lockdown, owners are slashing rent to attract and retain good tenants.
Young people make up a big portion of rental demand, but they may be struggling to find jobs right now. Last year, unemployment rate between the ages 20 to 29 averaged at 8.7%, well above the economy’s overall 5.5% rate.
To make things worse, expats are grumpy and many have left the city for good. At this moment, the tables are turning and the market is becoming a renter’s one.
The option of rising home prices seems unlikely. In 2018, the last time the Fed raised rates, home prices fell by about 10% and that was with economic growth at 2.8%. Now, Hong Kong is poised to enter a recession and home prices may fall by 20% by 2025, economists say.
For over two decades, Hong Kong’s real estate market has been pretty predictable. So in the last two years, home prices saw a mini-rebound whenever the city lifted its social-distancing restrictions.
Some investors might be tempted again, as social life gradually comes back but Hong Kong property is by no means a sure bet. Home prices tumbled by two-thirds from their peak before the Asian Financial Crisis in 1997 to the 2003 SARS outbreak, it was in a bear market for years even after that.