A US$6 trillion tidal wave of quantitative easing is coming, but it won't buoy Hong Kong home prices - here's why

By Sandy Li / SCMP | June 16, 2020 5:50 PM SGT
Illustration: SCMP
Hong Kong's homebuyers are unlikely to see a repeat of the 278 per cent surge in property prices seen over the past 12 years, because a contracting economy, rising unemployment and heightened political tensions are expected to dilute a fresh wave of quantitative easing (QE).
A record US$6 trillion to be unleashed by global central banks this year will do little to lift the city's property prices, which have fallen 5.4 per cent since their peak in May last year, analysts said, adding that the US Federal Reserve's indication to keep the interest rate close at zero through 2022 may offer scant support to the property market despite Hong Kong rates mirroring the US.
"The expectation is for a prolonged economic weakness, rather than a V-shaped recovery seen across quite many regional economies during the global financial crisis," said Harry Tan, head of research in Asia-Pacific at Nuveen Real Estate, which manages a portfolio of assets worth US$131 billion.
"The hit to business investment, labour market, consumer spending is likely to be more wide-ranging due to the very uncertain outlook and nature of the pandemic " most regional economies are expected to contract by the sharpest pace in many decades," he said.
The downcast outlook poses a potential danger for homebuyers, some of whom had been attracted in recent weeks by developers' discounts to enter the market. As property values fall faster than mortgages, borrowers stand the danger of falling into negative equity, which stood at 384 cases as of the end of March, according to data by the Hong Kong Monetary Authority (HKMA).
Global central banks are slashing interest rates and unleashing an unprecedented amount of financial liquidity to lift the global economy from the slump caused by the coronavirus pandemic.
"Six trillion dollars is a staggering amount that is equal to more than half the cumulative global QE total seen over 2009 to 2018," said Robert Sierra, director in Fitch's economics team. Global QE amounted to US$11.1 trillion between 2009 and 2018.
But residential property prices will not respond to QE this time. "The marginal impact of monetary easing and QE in 2020 is also likely to be less, given that interest rates in 2020 are already at new cyclical lows," said Nuveen Real Estate's Tan, adding that he expected home prices will decline by up to 20 per cent this year, continuing the price decline that started mid-2019.
The coming flood of cheap money is likely to draw comparisons with the QE the US Federal Reserve launched in the aftermath of the 2008 global financial crisis.
Hong Kong property prices are, however, unlikely to repeat their explosive growth despite the US implementing three rounds of QE between 2019 and this year. Because, unlike the financial crisis in 2008, this time around, the pandemic has posed greater economic challenges worldwide.
Moreover, nine out of 10 in the city's new mortgage contracts are already pegged to the interbank offer rate, as the cost of money is called.
In 2007, Benjamin Hung Pi-cheng persuaded Standard Chartered Bank, one of the three currency issuers of Hong Kong and one of the city's largest mortgage lenders, to introduce mortgages linked to the interbank rate, which changes every day to reflect the interest rates banks charge other banks, as a cheaper financing alternative for homeowners.
"When I was living overseas, the interbank rate was widely used as the base rate for mortgage products, with long-dated fixed-rate mortgages being the other popular alternative," Hung, now regional chief executive for Greater China and North Asia at the bank, told the South China Morning Post.
The bank's head of consumer banking in 2006, he asked his team in Hong Kong to explore this option and, a year later, launched the city's first mortgage plan linked to the Hong Kong Interbank Offered Rate (Hibor).
"It is gratifying to see Hibor-based mortgages now becoming widely accepted, with more than 90 per cent of the market now choosing the Hibor plan," he said.
"We have seen the diminishing usage of the prime rate as a reference rate, both for corporate and retail lending. With the current low-interest environment, Hibor referencing should bring about a lower cost of borrowing for homeowners."
Before Hung's intervention, Hong Kong homebuyers had no choice when they applied for mortgages " everyone was charged according to the prime lending rate, which is set by individual banks.
Today, nine out of 10 new mortgages in the city's HK$1.4 trillion (US$181 billion) home loan market are Hibor-linked, or H-plan, rising from less than 10 per cent in 2008, according to the Hong Kong Monetary Authority. H-plan mortgage borrowers are charged at lower interest rates than when opting for loans based on the prime rate, or P-plan loans.
Back in 2009, just as Hong Kong was seeing an influx of large amounts of "hot money" after the Fed adopted QE to boost its economy following the global financial crisis in late 2008, Raymond Chan, 40, decided to buy a 800 sq ft flat in Tung Chung Crescent, atop the MTR's Tung Chung station.
Chan, who works in the professional services industry, secured a HK$2 million mortgage loan for 25 years at 0.7 percentage points above the Hibor, but capped at 3.1 percentage points below the prime rate to avoid volatility. The unit, which cost him HK$3 million (US$387,091), is now worth HK$11 million.
At present, most H-plan borrowers will be charged at 1.3 percentage points above the Hibor, or capped at 2.75 percentage points below the prime rate at 5 to 5.25 per cent.
He has benefited from low interest rates. Supported by very low interest rates over a decade, his flat has more than tripled in value.
"When I bought the property, I didn't pay much attention to the market talk of how QE will help boost prices. What convinced me to make the decision [to buy] was the monthly mortgage instalment, which was lower than what my rent payments were back then. My gut feeling was " why not own a home?" Chan said.
He used to pay HK$8,500 a month for a flat of a similar size in the same housing estate. His monthly mortgage instalments payable to Standard Chartered, however, have ranged from HK$7,537 to HK$8,477, based on his effective mortgage rate, which was below 1 per cent during the first seven years. The highest it hit was around 2 per cent, he said.
He would have had to pay HK$8,632 per month if he had opted for a P-plan mortgage, which is currently charged at an effective rate of 2.15 per cent. Chan will pay as low as HK$261,234 in interest over the whole 25-year term under the H-plan, compared to HK$587,169 under the P-plan. His Hibor-linked mortgage could save him up to HK$325,935.
Political and economic uncertainties, however, could stall demand for property in the city despite a low-interest environment with plenty of money going around.
National People's Congress, China's highest legislative body, passed a resolution on May 28 to draft a tailor-made national security law for Hong Kong, triggering an international outcry that such a move may erode the autonomy of the city, and exacerbate an already fraught relationship between Beijing and Washington.
US President Donald Trump threatened that the US would retaliate and the administration has started to eliminate special treatment for Hong Kong. Such benefits include Hong Kong enjoying different and lower tariffs, as a separate customs area to mainland China.
"Aside from the Covid-19 pandemic affecting our economy, the biggest unknown the city faces is what kind of US sanctions will be imposed on it," said Alva To, vice-president and head of consulting in Greater China at Cushman & Wakefield.
Hong Kong's economy contracted by 8.9 per cent year on year in the first quarter, the largest decline since records began in 1974.
It has been hit by months of protests followed by the coronavirus pandemic since the start of this year, which have pushed its unemployment rate to 5.2 per cent, or 202,500 jobless for the three months ended in April, which is near a 10-year high and has dampened appetite for property among other big-ticket purchases.
Over the past 11 years, the one-month Hibor declined to between as low as 0.05 per cent and 1.19 per cent for nearly six years, when liquidity in the market gradually built up to HK$318 billion in November 2009, rising to a peak of HK$426 billion in November 2015.
Then, the Hibor started to edge up, rising to 2.3 per cent in 2018, when global QE purchases started to reduce by 73 per cent from a year ago to US$387 billion, according to data from mReferral Mortgage and Fitch.
"At that time, Hong Kong literally entered a negative interest rate [period] for nearly 10 years. In such circumstances, Hongkongers were encouraged to invest their money in stocks and property, instead of receiving no interest from bank savings," said Eric Tso, chief vice-president at mReferral.
He expected capital to start coming to Hong Kong later this year, as QE has yet to be fully implemented. "At least HK$60 billion will flow into the Hong Kong banking system in the latest round of global QE as early as December," he said. "The Hibor rate will enter a downward cycle and will hit 0.2 per cent this year, which is a positive for the property market."
Hong Kong's aggregate balance " the indicator of liquidity in the financial system " amounted to HK$122 billion on June 12. Such ample liquidity will lead to lower borrowing costs.
Stephanie Lau, vice-president and senior analyst at Moody's Investors Service, said QE was likely to push up asset prices, but may not have the same effect compared with the last cycle, given different circumstances.
"First, factors such as disruptions from the coronavirus and the lingering effects of social protests contribute to some uncertainty in Hong Kong's physical market. Second, interest rates at the beginning of the last global financial crisis were higher, so there was more room for rates to decline," she said.
Christopher Yip, analyst at S&P Global Ratings, said: "QE measures are unlikely to outweigh the impacts of current economic headwinds, and the pre-existing low-interest rate environment.
"We expect home prices to slide about 10 per cent by the end of 2020 from their peak last year due to the recessionary and sociopolitical climate in Hong Kong," he said.
Martin Wong, associate director for research and consultancy in Greater China at Knight Frank, said there has been robust demand for residential property in Hong Kong for living in.
"However, as the unemployment rate is on the rise, and there is a lag in its impact on property prices, we would expect there is further correction in home prices [ahead]," he said.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.
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