(Bloomberg) -- Hong Kong’s beleaguered real estate market is set for some relief after the city cut its base interest rate for the first time in four years, mirroring the Federal Reserve’s policy easing.
The Hong Kong Monetary Authority lowered the rate by a half percentage point to 5.25% Thursday from the highest level since 2007. That move was widely anticipated as the city has a currency peg to the greenback and follows the Fed in lockstep.
“The Fed’s rate cuts are expected to provide crucial relief to Hong Kong’s economic landscape,” said Fan Zhai, senior economist at the ASEAN+3 Macroeconomic Research Office. The high interest rate and strong Hong Kong dollar are some of the most significant factors weighing on the economy, he added.
The Hang Seng Index rose as much as 1.8%, with the tech gauge advancing more than 3% and the property subindex gaining 2.6%. Investors are betting on a rebound in real estate companies following the Fed cut.
After the Fed’s 50-basis-point cut, Chairman Jerome Powell cautioned that the reduction — more than forecast by most analysts — didn’t necessarily mean the central bank would continue on an aggressive pace. Officials expect an additional half-point easing by the end of the year, while markets are still gunning for deeper moves of 70 basis points.
High borrowing costs have weighed on the former British colony’s economy and housing market in recent years, with home prices falling to the lowest since 2016. The Fed pivot could bring some much-needed respite at a time when Hong Kong developers’ stocks are trading at all-time low valuations.
“When interest rates in the United States and Hong Kong are lowered, it will be beneficial to the operations of Hong Kong enterprises and have a positive impact on the asset market,” Financial Secretary Paul Chan said.
More aggressive cuts from the Fed would help buoy the real estate market, according to Raymond Cheng, head of China property research at CGS International Securities Hong Kong. If the Fed cuts 200 basis points by 2025, rental yields would rise above mortgage rates in the city, making investment more appealing.
HSBC Holdings Plc, the city’s largest lender, cut its best lending rate to 5.625% from 5.875%, the first easing of the rate that affects mortgages and small business loans since 2019.
Howard Lee, acting chief executive of HKMA, said at a Thursday briefing that there was room for market interest rates to ease, although he cautioned borrowing costs would remain relatively high in the foreseeable future.
“The public should carefully assess and continue to manage the interest rate risk while making property purchase, mortgage or other lending decisions,” Lee told reporters.
What Bloomberg Intelligence Says...
“Hong Kong’s tumbling home prices could arrest their decline in 2025 as the Fed’s rate cuts open a path to cheaper mortgages. Mass-residential rental yields could rise near 4% and surpass the risk-free rate to drive investment demand with a mild price recovery from eight-year lows. The unsold-homes backlog, at a 20-year high, might prevent any big price rebound.”
— Patrick Wong and Yan Chi John Wong
Read the full note here.
With the Fed rate cut freeing up space for Asia’s central banks, the focus now shifts to how much and how quickly the region’s rate setters will move, or in some cases whether they ease policy at all.
Hong Kong’s Chan cautioned that the city’s rate decisions “may not necessarily follow the trend” because they also depend on factors including local capital flows and market conditions.
--With assistance from April Ma.
(Updates with HSBC prime rate change and more comments)
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