Hong Kong Banks' Mortgage Rate Increases Take Steam Out of Housing Boom

Hong Kong banks may have succeeded where the government failed as rising mortgage rates curb home price gains and cut sales to the lowest level in two years, signaling the property market may have peaked.

HSBC Holdings Plc (HSBA) , which controls two of the city’s three- biggest banks by customers, is among lenders that accelerated mortgage rate increases in April as liquidity dried up. An index of home prices has stalled since March 20, while the number of sales in April fell 37.6 percent from a year earlier to the lowest in more than two years, according to the Land Registry .

The government has come under pressure to cool the property market, the world’s priciest according to Savills Plc, which had surged as much as 70 percent since the beginning of 2009 on record-low mortgage rates, an influx of buyers from other Chinese cities, and a lack of supply. Its toughest measures in November, including releasing more land and higher deposit requirements, had failed to contain what the Hong Kong Monetary Authority warned was a “credit-fueled property bubble.”

“The government measures had limited impact,” said Simon Lo, Hong Kong-based head of research at Colliers International “The only thing that has an immediate impact on the market, save for major external shocks, is interest rates.”

Andrew Lawrence, a Hong Kong-based analyst at Barclays Capital , is among those betting the property market in the city of 7 million people has peaked.

“Buying sentiment has materially declined,” he wrote in a May 26 report, with a “negative” rating on Hong Kong developers, meaning their stocks’ valuations are deteriorating. “With liquidity continuing to tighten, we expect additional mortgage rate increases this year, which are likely to further impact buying sentiment and transaction volumes.”

The Hang Seng Property Index, which tracks seven of the city’s biggest developers, has fallen 6 percent this year, lagging the 0.4 percent decline in the benchmark Hang Seng Index . Six of the stocks in the index have dropped: Sun Hung Kai Properties Ltd. (16) , the world’s biggest developer by value, lost 9.5 percent, while Hang Lung Properties Ltd. (101) fell 13 percent.

Since 2009, interest rates in Hong Kong have been close to the lowest since 2004, when the city was recovering from an economic slump triggered by the Sept. 11 U.S. terrorist attacks in 2001 and the 2003 Severe Acute Respiratory Syndrome epidemic in Asia . Hong Kong’s three biggest mortgage lenders currently charge borrowers about 1.7 percent to 2.2 percent, or 1.5 to 2 percentage points above the Hong Kong Interbank Offer Rate. That compares with rates of about 1 percent last year, when lenders often priced mortgage terms at less than 1 percentage point above Hibor, the rate banks charge each other for borrowing.

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