Saturday, April 16, 2011

Money getting a little less cheap

Friday saw HSBC and DBS join the ranks of banks raising the interest rate on new mortgages. The new benchmark for HIBOR linked mortgages is now around HIBOR plus 1.75 per cent, making the effective interest rate 1.95 per cent.

Funding pressures have been blamed for the increase - apparently banks are having difficulty in attracting deposits. Given that I have seen zero evidence of deposit rates increasing and the banking industry is still showing a healthy loan to deposit ratio, this explanation is, at best, somewhat hard to accept.

In any event the rates have gone up but:

1. The increase has no bearing on existing loans - HIBOR itself has not changed

2. Borrowing is still cheap. With inflation (as measured by CPI) still well above 3 per cent, the real cost of funding is still negative

3. The availability of funding is a greater constraint on investing than the price paid for debt - banks are using valuations which are generally below market and require both high deposits and a healthy margin of safety when evaluating borrowers' ability to repay

4. The increase in borrowing costs will help improve banks' NIM, but given that the increase will only apply to new loans, it will be a while before there is a meaningful impact on bank profits

5. There will be no impact for the well heeled cash buyers who make up a sizable part of the market.

The bottom line is that the interest rate increase is unlikely to have much impact in and of itself. Of greater significance is the question of whether this is the beginning of both a trend of rising interest rates and other measures which will make property less attractive as an investment asset class. With the former, events in the US will have as much, if not more,impact than local events. As to the latter, the biggest issue is the government controlled supply of land, with other government initiatives such as increased stamp duty and the continued demand from PRC investors.

So far, I see no reason to change my strategy of holding my properties for the longer term. The incentive for not paying off mortgages early just got stronger.


Anonymous said...

"Given that I have seen zero evidence of deposit rates increasing "

For this you need to look at the smaller banks and may need to read Chinese?

for example, on their website Chong Hing Bank quote 0.34 percent for 6 month HKD time deposit of HKD500,000. In their Tsuen Wan branch on Thursday there was a note on the counters (Chinese only) offering 1.1 percent for the same

So there does appear to be a little pressure there.

traineeinvestor said...

Thanks for that. I don't read Chinese so I would have missed these.

I agree that looks like a "little pressure" but so far HIBOR has not moved which suggests that it is individual banks and not the market as a whole which is under pressure?