Sunday, July 02, 2006

No interest rate rises here!

Hong Kong banks did not follow the Federal Reserve in raising interest rates this week. Given that the vast majority of mortgage debt in Hong Kong is at floating rates this is good news for me and good news for the the property market.

The previous increase in interest rates by the Federal Reserve also failed to have a follow through effect on interest rates in Hong Kong. Given that the Hong Kong dollar is pegged to the US dollar, I have to question whether the emerging yield gap between deposit and lending rates for Hong Kong dollars and those for US dollars is sustainable? My conclusion is that at this time Hong Kong does not need higher interest rates because:

1.Hong Kong's economy is still booming but shows no signs of over heating;

2. while property prices and the share market have had a good run over the last three years, there is nothing that could be described as a bubble;

3. Hong Kong as a whole is a very liquid economy and one that is not highly leveraged (either at the corporate level or the individual level). The laws of supply and demand currently favour of the borrower.

For information, while many markets have fixed rate mortgage products, in Hong Kong, fixed rates are less common and, generally, quite expensive.

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