The slight price recovery (i.e. 0.7%) in April not only bucked the falling trend of Hong Kong residential prices in the past months but also posed the same old question – “To buy or not to buy?”. The difficult choice here stems from the different projections on the length of current down cycle. Is the April figure showing an early sign of market recovery or is it just a mid-term halt? The key lies in the level of real (i.e. inflation-adjusted) mortgage rates.
Currently, residential mortgage rates are averaged at about 2.5% while CPI inflation is running at 3%. So, real mortgage rates remain negative and it makes sense to hold real estate rather than cash from an investment point of view. However, it is going to change in the next 12 months.
First, mortgage rates will certainly go up when US rates and local interbank rates edge up. Second, inflation is likely to taper off this year in anticipation of weakening economic growth. These will make real mortgage rate less negative or even positive in late 2016. Note that the recent surge in the number of mortgagee sales as a result of overleveraging could dampen any sharp price rise. In my view, property prices could hardly stay flat in the second half of 2016.
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