Most investors are coming to terms with the end of the era of abnormal easy credit that had driven Hong Kong stock and property prices to record-breaking levels. But the public has yet to accept the imminent change that would make an enormous impact not only on their savings but also on their jobs and incomes.

Anyone who has been following the stock market would have noticed a definite change in investors' mood in the past several weeks from one of irrational exuberance to an unbearable feeling of unease.

Last week, panic struck when the benchmark stock indicator dropped a total of about 5 percent before recovering on Friday. But that was widely seen as nothing more than a technical rally. The turnover on the stock exchange was too low to indicate a reverse of the downward trend.

Even the mighty property market, where average home prices have risen for 27 consecutive months, is showing signs of weakening. For their own interests, property agents have continued to feed the gullible local media with improbable stories of individual properties changing hands at record prices. But property market analysts of major institutions are predicting a fall of up to 10 percent in average home prices in coming months.

More importantly, the large developers, one by one, are lowering their prices, ostensibly to speed up sales of their newly completed apartments before the expected crunch. They know better than anyone else there is a need to deflate the property price bubble to prevent it from bursting.

Past experience shows that the fallout from such a calamity could spell a prolonged lean period. Once lost, it will take many years to rebuild public confidence in Hong Kong properties.

The public appears to have chosen to ignore the signs of a changing economic environment. Results of several recent surveys show that the majority of respondents still believe that asset prices will continue to rise and rise, apparently oblivious to the looming threat of credit tightening, rising cost of borrowing and an economic downturn brought about by the escalating trade war between the United States and the Chinese mainland.

Latest developments have shown that the Hong Kong economy and its asset markets are facing real threats that spell the end of the good times.

The projected decline in external trade would come at an unfortunate time, when all the major infrastructure projects are completed or near completion. This leaves the government with limited options to stimulate economic growth by increasing capital expenditure.

What's more, developers will likely curtail the building of large scale residential projects when demand is seen to be damped by rising borrowing costs. Even domestic consumption expenditure could fall along with consumer confidence eroded by the prospect of a withering job market and falling wages.

Indeed, the cost of borrowing has already begun to rise, although banks have stubbornly kept the benchmark lending rate, or prime rate, unchanged. But for how much longer?

Banks' cost of funds, indicated by the rates at which banks lend to each other, has been rising in the past several months, prompting some major banks to try to attract long-term deposits from customers. In recent weeks, nearly all the major lenders have raised their mortgage rates by up to 20 basis points.

This was only the beginning of the high interest rate cycle. More increases are widely expected to come after the next likely US rate hike in the September meeting of the Federal Reserve's policy committee. By then, banks in Hong Kong will find it increasingly difficult to keep the prime lending rate unchanged as they have done in the past seven US rate hikes since the end of 2016. The increase may be moderate, by about 25 basis points; but the psychological effect it may have on mortgage borrowers could be huge.

Numerous past studies have shown that many homeowners who bought their properties in the past two years are now paying an average of up to 80 percent of their monthly household incomes in servicing their mortgage loans. A mere 25 basis-point rise in interest rate could add a huge burden on these families.

To be sure, properties are rightly considered by many people as the best storage of value in the long term. But for now, the market is fraught with uncertainties that could create hardships to those who jump in at current high prices.

The author is a veteran current affairs commentator.

(HK Edition 08/21/2018 page8)