Living Smart

IV PUBLIC POLICY & SOCIAL SCIENCE 118 119 Mortgage hikes bring home rate fears Prof. Francis LUI Adjunct Professor, Department of Economics W hat was the impact on property prices after Hong Kong banks raised interest rates by 0.125 to 0.25 percent last month? Property prices can be predicted using economic theories and analyzing supply and demand factors, while interest rates refer to the prices of obtaining funds. With a rate hike, the additional monthly amount for mortgage repayment depends on the committed rate and loan period. For example, an increase from 3 to 3.125 percent with a 25- year repayment period increases monthly repayments by 1.37 percent. If the increase reaches 5 percent, monthly repayments rise 23.3 percent. The burden of a 1.37 percent increase on monthly repayments is negligible since it is approximately equivalent to the effects caused by the average monthly increase in property prices last year. However, a sustained increase in US interest rates will have an enormous impact on market psychology. If monthly repayments climb by more than 20 percent, property prices will likely fall significantly. Rate hikes also lead to a “wealth effect” on the macroeconomy since borrowers face heavier burdens and wealth reductions. Most property buyers are borrowers and will feel poorer, with a lower propensity to consume. Nevertheless, the magnitude of rate hikes at present is still small and the wealth effect should not be significant. The impact of rate hikes on proper t y pr i ces i s ma i n l y on demand. Hong Kong’ s high property prices are caused by the severely inadequate supply. Even if there was an even distribution of the completed properties, each person would only be entitled to 172 square feet – far smaller than the typical size in other countries. In her policy address, Chief Executive Carrie LAM CHENG Yuet-Ngor announced that the government will build several islands totaling 1,700 hectares. The sheer size of this plan will lead to expectations that are more powerful than the rate hike in suppressing property prices, provided the government can overcome the political resistance against this. Another factor is US interest rates. The Donald Trump administration implemented substantial tax reductions at the end of last year, which should be positive news. However, US government spending continued to balloon, which will inevitably lead to a financial deficit or even growing trade deficits. Its national debt may also increase by US$2 trillion (HK$15.6 trillion) within the next two to three years. Since these will exacerbate the impact of interest rate hikes, it is necessary to take due precautions now. Published on October 30, 2018