Not all discounted flat prices offset the increased interest rate. Buyers must do the maths and put in the work.

The pressure on banks' capital costs has ratcheted up. Recently, the one-month Hong Kong dollar interbank offered rate (HIBOR) rose from about 0.2% in early May to 1.9% on 18 August 2022, a 28-and-a-half-month high. HSBC raised the H-press cap from P-2.5% to P-2.25%, meaning the interest rate will rise by 0.25%, and the actual interest rate will increase to 2.75%. Monthly repayments for loans of HK$5 million increased by HK$656.

At the same time, HSBC also launched the first-year fixed-rate mortgage plan until October 15. It excludes the H mortgage plan. In addition, new mortgage loan customers can also apply for a fixed-rate mortgage plan. The scheme is what it says on the tin – a fixed mortgage rate of 2.75% in the first year of the loan term. After the fixed interest period, the mortgage interest rate will be based on HIBOR with a capped interest rate. HSBC's Prime Rate is 5%.

Standard Chartered raised its H-cap rate on 24 August from P-2.75% to P-2.5%, increasing the interest rate by 0.25%. Based on the current Standard Chartered Prime Rate of 5.25%, the ceiling rose to 2.75%, which is on par with HSBC.

There was an immediate reaction from the market. Buyers reduced their offers, and sellers discounted their asking prices to meet buyers’ expectations.?

Source: Midland Research

By looking at Midlands Research’s private residential transaction records, the instant response is obvious. As at 25 August 2022, the primary market recorded 886 transactions, 24% down on July’s volume. The secondary market saw a 15.2% gap from July, with only 2,279.

Source: HKET

I extracted transactions for the Top 10 estates from May to August and compared their sale price before and after the HIBOR hikes. Top-10 estate prices have dropped from 5% to 10% since June. But will it be enough to offset the extra interest? Let’s check these transactions to decide whether or not it’s worth buying now and precisely what kind of interest increase buyers will face. I have assumed buyers would apply for a 30-year mortgage and an LTV of 90%.

City One Shatin and Kingswood Villas

In City One Shatin, a 285 sq. ft. based on a saleable area (SA) unit changed hands on 17 June for HK$5.4 million, or HK$18,947 per sq. ft. But, on 29 July, a unit of the same size, in the same housing estate, sold for HK$4.85 million, or HK$17,018 per sq. ft. The transaction saved the buyer roughly HK$550,000 or 10.2%. Unfortunately, the HIBOR rate at 29 July was 1.33%, the actual rate 2.63%, and the ceiling rate was 2.5%, compared to June’s 1.9%. The extra interest is HK$324,060. Thus, this buyer only saved around HK$225,940.?

In Kingswood Villas on 2 June, a 455 sq. ft. sold for HK$5.7 million, while on 27 July, a flat of the same size sold for HK$5.3 million or HK$11,648 per sq. ft. The July buyer enjoyed a 7% discount of HK$400,000. However, the actual rate on 27 July was 2.61%, touching the ceiling rate o 2.5%. The extra interest works out to HK$762,185.

Discount Sale Price and Mortgage Interest Estimation (City One Shatin & Kingswood Villas)

According to Centaline Agency’s latest rental and sales transactions from January 2022 until August 2022, City One had 256 sales and 191 rentals, and Kingswood had 295 sales with 152 rentals. These figures reflect that buyers find discounts more attractive than leasing, even though monthly rents are around HK$5,500 and monthly mortgage repayments are around HK$7,800.

Mortgage Repayments, Asking Rents, Rentals and Sales (City One Shatin & Kingswood Villas)

Source: EPRC & Centaline Agency

Laguna City and Sceneway Garden

The newest developments among the Top 10 estates in Kowloon, Laguna City and Sceneway Garden show slight depreciation. Owners are only offing around a 3.8% discount in Laguna City.

On 17 June, a buyer paid HK$7.8 million, and on 18 July, a flat of the same size transacted for HK$7.5 million. The July buyer saved HK$300,000 on their transaction but would pay HK$144,297 if they were eligible for the MIP.

However, in Sceneway Garden, a 628 sq. ft. SA home was transacted on 17 June for HK$9.8 million. But, on 15 August, a flat with 626 sq. ft. SA transacted for HK$9.488 million, saving the buyer HK$312,000.

But, actual interest jumped from 1.9% to 3.02% (ceiling rate 2.75%), so they will pay an extra HK$1.2 million in interest. Buyers should ensure they calculate the total mortgage interest and then choose the best LTV ratio in the MIP.

Discount Sale Price and Mortgage Interest Estimation (Laguna City & Sceneway Garden)

The two developments have a yawning gap between rents and mortgage repayments of around HK$8,500 to HK$15,000. So, it is no wonder that potential buyers would prefer instead to lease.

Mortgage Repayments, Asking Rents, Rentals and Sales (Laguna City and Sceneway Garden)

Source: EPRC & Centaline Agency

Mei Foo Sun Chuen and Whampoa Garden

According to Memfus Wong, a 520 sq. ft. unit sold for HK$6.98 million on 6 June in Mei Foo Sun Chuen, and a 507 sq. ft. home in the same development sold for HK$6.5 million on 20 July. The July buyer enjoyed a HK$480,000 discount on the June sale. The HIBOR rate at 20 July was 0.92%, the actual rate was 2.22%, and 1.53% more than June’s. The July buyer will be paying HK$612,136 in extra interest, which is a long way off what they gained in the discount.

I found a similar phenomenon in Whampoa Garden. On 6 June, a buyer paid HK$7 million for 388 sq. ft., while on 29 July, a flat of the same size transacted for HK$6.45 million. The July buyer enjoyed a 7.9% or HK$550,000 discount, but at that time, the interest rate was 2.63%, generating HK$848,178 in extra interest.

Discount Sale Price and Mortgage Interest Estimation (Mei Foo Sun Chuen and Whampoa Garden)

From January until 25 August, Mei Foo Sun Chuen had 248 sales and 83 rentals, while Whampoa Garden had 180 sales and 49 rentals. The figures show potential buyers are happy to commit rather than lease if the price is right.

Mortgage Repayments, Asking Rents, Rentals and Sales (Mei Foo Sun Chuen & Whampoa Garden)

Source: EPRC & Centaline Agency

Kornhill and Taikoo Shing

According to Memfus Wong, on 26 May, a 521 sq. ft. unit in Kornhill sold for HK$8.9 million, and on 17 June, a 509 sq. ft. unit in the same development sold for HK$8.68 million, or a 2.5% discount of HK$220,000. The HIBOR rate at 17 June was 0.6%, the actual rate 1.9%, and compared to May’s 1.5%, the extra interest would be HK$500,764. Once again, the discount will not cover the extra interest.

On 5 May, a 514 sq. ft. unit sold for HK$10 million in Taikoo Shing. On 20 June, a similar-sized unit in the same development sold for HK$9.3 million, giving the buyer a 7% discount of HK$700,000. With the interest rate at 1.91%, the June buyer will only be paying HK$450,200 in extra interest, leaving them in the black. For this outcome, buyers need to negotiate to bring the price down as low as possible.

Discount Sale Price and Mortgage Interest Estimation (Kornhill & Taikoo Shing)

According to Centaline Agency data, from January 2022 until 25 August, Taikoo Shing is the rental favourite with 206 new leasings, slightly below its 221 sales. The figures show that some potential buyers are sheltering in the leasing market.

Mortgage Repayments, Asking Rents, Rentals and Sales (Kornhill & Taikoo Shing)

Source: EPRC & Centaline Agency

South Horizon and Heng Fa Chuen

In South Horizon and Heng Fa Chuen, discounts can offset the extra interest rate.

On 6 June, in South Horizon, a 526 sq. ft. home sold for HK$9.48 million. On 20 June, a home of similar size sold for HK$8.5 million, giving the buyer a 10.3% discount at HK$980,000. The 20 June buyer’s extra interest is only around HK$292,998.

Heng Fa Chuen followed South Horizon’s example. On 6 May, a 517 sq. ft. unit sold for HK$8.22 million. On 20 June, a similar-sized home sold for HK$7.58 million, giving the buyer a 7.8% discount of HK$640,000. The buyer will only pay HK$351,784 in extra interest.

Discount Sale Price and Mortgage Interest Estimation (South Horizon & Heng Fa Chuen)

Mortgage Repayments, Asking Rents, Rentals and Sales (South Horizon & Heng Fa Chuen)

Source: EPRC & Centaline Agency

Buyers may find they have an even heavier financial burden soon. Major banks believe the best lending rate may increase by 0.25% next month.

If the prime rate rises, both the mortgage rates based on HIBOR and the prime rate would hit 3%. HIBOR-linked mortgages will still be the most popular, but many new buyers may turn to loans based on the prime rate, which is more stable than the HIBOR.

Flat prices in Hong Kong are expected to drop a further 2% amid the rising interest rates. But the rise in the mortgage rate cap may not have as significant an impact as thought because developers, and second-hand sellers, had expected it and already lowered their prices Developers continue to provide attractive discounts to appeal to the young and first-time buyers.

Thank you