Does the Fed's Interest Rate Cut Affect Hong Kong's Property Market?

On July 31, the US Federal Reserve cut interest rates for the first time in more than a decade, citing muted inflation, concerns about global growth and trade uncertainty. We have already been in a (very) low interest rate environment for a decade, so will this rate cut affect Hong Kong’s real estate market?

The widely expected 0.25% rate cut from 2.0 to 2.25% marks the end of the US interest rate upcycle that began in December 2015. The market is focusing on how long the rate cut cycle will last, and whether the US will return to a zero interest rate environment. In the short-term, a single rate cut from the Fed may improve some buyers' confidence but is not substantial enough to overcome concerns over Hong Kong’s future. But if this marks the beginning of further cuts, an easing of monetary policy supports higher asset prices, which in turn may support further upsides to the housing market.

Lending and Rates in Hong Kong

As the Hong Kong dollar remains pegged to the US dollar, the Hong Kong Monetary Authority (HKMA) runs its monetary policy in sync with the Fed. However, commercial banks in Hong Kong are likely to maintain a cautious approach in their liquidity management, and might not all follow the HKMA in lowering their best lending rates.

The Fed raised rates nine times between December 2015 and 2018, but the prime lending rate in Hong Kong was only increased once in September 2018, and by 0.125%. It is the general belief that the prime rate in Hong Kong will only be reduced marginally, if at all, and shouldn’t be a major stimulus for Hong Kong’s property owners.

Loose Monetary Policy Favours Asset Prices

Led by the Fed’s more dovish monetary policy stance, 19 central banks have cut rates in recent months, including New Zealand, which surprised the market with a more-than-expected cut. Many economists expect the European Central Bank will soon follow in the Fed's footsteps as well.

A loose monetary policy worldwide creates increased liquidity which, in turn, sees greater inflow into the asset market. The lower interest rates are stimulating improved market confidence and positively affecting the economy. When this occurs on a global scale, Hong Kong and other financial centres benefit the most, with greater capital inflow supporting higher asset markets, including property.

No Direct Danger to Property Prices

Even if interest rates are brought to lower levels, they will eventually rise again, but interest rates and property prices are only somewhat negatively correlated. For example, when the US increased rates during 2015 to 2017, Hong Kong’s property prices continued rising to record heights, driven by optimism about the economic recovery.

The first stage of a cyclical interest rate increase is driven by a recovering, growing economy, and it’s only when the interest rates approach high levels of approximately 7%+ (signaling an overheating economy) that property mortgage costs start to become prohibitive, with prices suffering as a result of high borrowing costs.

At present, Hong Kong's mortgage interest rates range between 2% to 3%, far below dangerous levels, and the US interest rate cut will further mute inflation pressures, providing support for the local property market.

Market Fundamentals are Still Solid

The US interest rate cut proves that in the face of global economic concerns, the world’s largest central bank still has policy tools at its discretion. Most importantly, demand for property in Hong Kong still far exceeds supply and it will still benefit from broad growth in Asia. Assuming Hong Kong’s recent domestic tensions ease and the trade war doesn’t escalate to crisis levels, property market activity is likely to rebound quickly as it has done in the past.