Analysts warn of situation reversal if interest rates rise in parallel with US

As Hong Kong's home affordability ratio surged moderately, real estate analysts cautioned that the ratio may jump to an alarming 75 percent level in the future when the city's interest rate level rises in parallel to the anticipated US interest rate hike starting in 2015.

Local real estate agent Ricacorp Properties Ltd, in its latest research report, said that the city's local home affordability ratio at the end of June rose to 41.24 percent, the highest level in the last 11 years. However, the current ratio which is still below the 50 percent alarm level.

Home affordability ratio is the household monthly income ratio that is used in the calculations of home mortgage loans repayment. The ratio is widely used as the benchmark to gauge the financial capability of a local household to repay a home mortgage loan. If the ratio is too high, this may pose a systemic risk to the local property market when a surge in local mortgage loan rate may cause defaults on mortgage loans.

"Given that Hong Kong may raise interest rate by 2 percent starting in 2015 and assuming local home prices and average household income (stay) constant, the local affordability ratio will jump to 49.35 percent at that time," Ricacorp Properties Head of Research Patrick Chow told China Daily. "This is still a healthy ratio to us."

The US Federal Reserve said that it will maintain its ultra-low interest rate level until 2014 when the central bank can be sure that the economic recovery is firmly on track.

"Local home prices will remain stable and remain in the upside until Hong Kong starts to increase interest rate in 2015 - one year after US posts a solid economic recovery. The current low interest rate level in the city will support local home prices until 2015 by attracting ample liquidity into the local property market." Chow told China Daily.

Chow said, "Local home prices have already exceeded the 1997 peak level, so they will unleash more optimistic sentiment in the market and push prices up further." The current local home prices are 9.2 percent higher than the 1997 peak level, according to government data.

However, some other property analysts are less optimistic, saying the anticipated interest rate hike can rapidly deteriorate the local households' financial capabilities to repay home mortgage loans.

"Affordability ratio will rise to 74 percent from the current 58 percent if the mortgage rate increases to 4.4 percent, assuming home prices remain constant," international real estate advisory firm Knight Frank said.

"If the mortgage rate increased to 5.4 percent while home prices decrease by 10 percent, the affordability ratio can still jump to 75 percent," Knight Frank cautioned.

The government said in May that home affordability ratio in the first quarter stands at 46.4 percent and warned that the ratio can surge to 60 percent if interest rates rise by 3 percent, higher than the average 20-year level.

oswald@chinadailyhk.com

(HK Edition 07/28/2012 page2)