Market interest rates in Hong Kong have jumped recently, reaching a nine-year high of 1.3% after the Fed’s rate hike this week. The unusually large spread between HK and US interbank rates that has persisted through most of this year has halved since September. Our fed funds rate forecast implies that Hong Kong rates will continue to climb over the coming quarters to around 2.5% by the end of next year. This, we fear, will be enough to trigger a sharp fall in property prices in the city. More than 90% of new mortgages in Hong Kong are priced off interbank rates. And valuations in the city’s property market look stretched. The value of outstanding mortgages in Hong Kong has doubled over the last decade, while wages have risen only by a little more than a third. Relative to incomes, home prices in the city just hit a new record high last quarter.
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