💹 The relationship between the property market and interest rates: How does the interest rate hike cycle affect property prices?

Hong Kong's property market has long been considered one of the most expensive in the world, and interest rates are a key factor influencing price trends. Especially given Hong Kong's linked exchange rate system, interest rate movements largely track those of the US Federal Reserve. Consequently, every US rate hike or cut sparks a flurry of discussion about the Hong Kong property market. Today, we'll provide an in-depth analysis of how interest rates are linked to the property market and how interest rate hike cycles impact the market. We'll also share advice from financial planners to better inform investment and mortgage decisions.

🔑 Why do interest rates affect the property market?

1. Mortgage costs are skyrocketing 💸

• Most Hong Kong residents rely on mortgages to buy properties, and rising interest rates mean an increase in the amount of mortgage payments.
• For example: If you borrow 5 million for 30 years and the interest rate increases from 2% to 4%, the payment will increase from about 18,000 to more than 23,000.
• With the huge pressure of mortgage payments, buyers are less willing to enter the market, and house prices are naturally under pressure.

2. Changes in investment attractiveness📉📈

• When interest rates are low and there is no interest on depositing money in a bank, investors are more inclined to buy properties and collect rental income.
• When interest rates are high and the returns from bank deposits and bonds are attractive, some funds will leave the property market.

3. Market psychology

• Raising interest rates usually means that the government wants to curb inflation and the economic outlook may weaken.
• When the market sentiment is pessimistic, buyers tend to be cautious and trading volume decreases.

📊 Hong Kong’s historical experience: the interaction between interest rates and property prices

1997 Asian financial crisis

• At that time, the United States raised interest rates, and Hong Kong followed suit, causing mortgage rates to rise sharply.
• Coupled with the impact of the financial crisis, housing prices fell by more than 60% from their peak.

2003 SARS low interest rate environment

• After the SARS outbreak, the economy was in a downturn and interest rates in Hong Kong fell.
• The low interest rate environment and government promotion have restored citizens' confidence in buying homes, and the property market has rebounded from the bottom.

2008 financial tsunami

• The United States has slashed interest rates to near zero, and Hong Kong has also entered an ultra-low interest rate environment.
• A large amount of hot money poured in, and funds sought a way out. House prices rose rapidly from 2009 to a high point in 2018.

2022–2023 US interest rate hike cycle

• In order to curb high inflation, the Federal Reserve raised interest rates several times in a short period of time, and Hong Kong simultaneously raised its prime lending rate.
• The local property market transaction volume has declined, the number of second-hand properties listed has increased, and the prices of some housing estates have dropped by 10% to 20%.

🏠 How do interest rate hikes affect different types of buyers?

First-time homebuyers

• Mortgage costs are rising and affordability is declining.
• Some buyers may need to reduce their budget and choose smaller units or properties in remote areas.

Investors💼

• The gap between rental returns and mortgage costs has widened, weakening investment attractiveness.
• Once there is no significant increase in housing prices, investors may choose to leave the market.

People with multi-storey properties🏘️

• Interest rate hikes will increase holding costs, especially for commercial buildings or industrial units, which will put great pressure on cash flow.
• There is a chance that they will sell some of their properties and increase market supply.

⚠️ Risks and Challenges

interest rate risk

The interest rate hike cycle is not necessarily short. Once high interest rates are maintained for a long time, the pressure of mortgage repayments will be greatly increased.

Economic uncertainty

Interest rate hikes are usually accompanied by an economic slowdown and rising unemployment, making it more difficult for homeowners to afford mortgage payments.

Policy factors

In order to stabilize the property market, the Hong Kong government may stimulate demand by relaxing mortgage ratios or reducing stamp duties. These measures will partially offset the impact of interest rate hikes.

💡 Editor's Tips

1. Do a stress test : Don’t just use the current interest rate; anticipate a possible 1-2 percentage point increase in the future to see if you can handle it.
2. Maintain cash flow : Don't tie up all your funds for a down payment. Set aside emergency funds to cope with interest rate hikes or unstable income.
3. Diversify your investments : When interest rates are high, consider putting some of your funds into fixed deposits or bonds to ensure a balanced asset portfolio.
4. Long-term thinking : Although the property market will be affected by the interest rate hike in the short term, Hong Kong's supply is limited and will remain supportive in the long run.

📌 Summary

Interest rates and the property market are like twins: low interest rates fuel a booming market, while rising rates create pressure. While interest rate hikes can cause short-term price fluctuations, this doesn't necessarily spell doom for the property market. Financial planners recommend that property purchases be primarily for personal use and long-term investment, rather than simply for short-term price appreciation.

My final words: This interest rate hike cycle is like an endurance race; not everyone can handle it smoothly. The most important thing is to assess your financial strength and avoid excessive borrowing, so you can proceed steadily. 💪🏠💰