Buildings on the Kowloon side of Victoria Harbour. DTZ warned of risks if the city's near-zero interest rates end. Jerome Favre / Bloomberg

Interest rate movements may pose the biggest variable to the local property market this year, with a turnaround from the current ultra-low level weighing on buyers' cash flow, property agency DTZ warned Tuesday.

"An abnormally low interest rate that eases the burden of mortgage payments has been one factor behind the boom of the local residential market," said Alva To, DTZ's head of consulting for the Greater China region. "However, the prospect of interest rate hikes in the US and Europe has been recently highlighted by the Hong Kong Monetary Authority. This can be seen as a reminder that market sentiment could be tied to changes in interest rates."

Speaking at the Legislative Council on March 1, Norman Chan, chief executive of the city's de facto central bank, said that interest rate hikes in the developed economies could come earlier than the market's forecast for the first quarter in 2012.

"If the US raises interest rates, capital may move out of Hong Kong, which will cause significant impact on the local market," said Chan, who called for caution from prospective home buyers who rely on mortgage loans.

According to DTZ's calculation, if you take the current mortgage interest rate which stands at around 1.03 percent (Hibor + 0.8 percent), in the case of a 70 percent mortgage of a 20-year term for a residential unit costing HK$5 million, homes with a rental yield below 4 percent already have negative cash flows.

"Any interest rate rise would affect the cash flow situation further. Amid the many favorable factors, the movement of interest rates is the biggest concern towards the development of the residential market in the near future," said DTZ's To.

According to Willy W.K. Liu, managing director at Ricacorp Properties Limited, a local real estate agency, the current level for rental yields in Hong Kong is about 3 percent for the mass market and 2 percent for the luxury market.

Rental yield is the ratio of monthly rental income to the property price.

Liu believes that the currently low interest rate environment will continue until the end of the year at least. And taking in other factors such as mainland buyers and economic fundamentals, the local property market will sustain its uptrend.

According to the latest figures from DTZ's research department, the number of home transactions dropped to 10,147 in January from 12,024 in December under the influence of the government's cooling measures. In February, the figure rebounded to 12,617.

Between April 2009 and February 2011, the number of home transactions per month had been above 10,000 for 23 months. DTZ believes that homes transactions in March are set to reach 13,000, backed up by positive market sentiment.

Along with the rebound in transaction volume, home prices also climbed to significant levels in recent weeks. Centaline Property Agency Ltd's Centa-City Leading Index, a popular home price index in the city, rose to 94.81 for the week ended Feb 27 - the fourth consecutive weekly rise. The current reading is very near the 1997 peak of 100.

China Daily

(HK Edition 03/09/2011 page2)