With interest rates likely to have peaked, Hong Kong home prices will soon begin to look up, Knight Frank analyst says

With inflation in the US, the world’s largest economy, showing signs of cooling down, normalising of interest rates may come earlier than in the UK and the euro zone, said Liam Bailey, global head of research at Knight Frank.

Hong Kong’s peg to the US dollar means an automatic adjustment to the city’s interest rates alongside the US.

“As rates begin to fall globally, that will be the trigger for improved affordability and will provide the conditions for house price growth, so the US and Hong Kong, in theory, will see prices grow earlier,” Bailey said.

“That said, the conditions for stronger prices also require consumer confidence and positive household wealth conditions. In the US one can see how these conditions will be present in the near-term. It may be delayed in Hong Kong until there is a broader recovery in the local and wider China economies.”

The US Federal Reserve embarked on a path of aggressive interest rate hikes in March 2022, raising it 11 times to a target rate of between 5.25 per cent and 5.5 per cent so far. Inflation has generally been brought under control, with the latest reading at 3.7 per cent in August, still a long way from the Fed’s 2 per cent target, but much lower than the 40-year high of 9.1 per cent in June last year. These figures have raised hopes that the US monetary authorities are likely to be swayed to ease rates sooner that many other markets.

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The Fed’s pause last week is another indication that the rate hike may be coming to an end soon.

On the other hand, in the UK and the euro zone, where monetary authorities have been trying to tame consumer price rises to 2 per cent, inflation is proving to be stickier.

In the UK, the Bank of England has raised interest rates 14 times since December 2021 to 5.25 per cent, where inflation cooled to 6.7 per cent in August. In the EU, the European Central Bank lifted the interest rate to a record high of 4 per cent on September 14, as inflation hovered at 5.2 per cent last month. Inflation in the euro zone is predicted to be 5.6 per cent on average in 2023.

With Hong Kong following the Fed, the rate cut moves will be quicker, unlike the UK and Europe, where it is more likely at the end of 2024, Bailey said, adding that the falling rates are likely to boost home prices in the US, but may take some time in Hong Kong.

Overall, Bailey said the “worst” of the uncertainty is likely over for global property markets.

“In 2022, you had a period when it was clear inflation was rising rapidly,” he said. “No one quite knew the end game, how far it would go on, but now we’re probably at a point where we’re getting close to the end of the tightening cycle.”

Global property prices will probably be at their lowest level in the first quarter next year, he added.

Besides interest rates, other factors are likely to influence the direction of home prices next year, said Kashif Ansari, co-founder and group CEO of Juwai IQI.

“In the US, a supply shortage will keep prices nearly flat over the next six months and drive increases in home prices by around 5 per cent in 2024,” he said. “In Hong Kong, the slower economy and low transaction numbers will keep the market sleepy until the middle of 2024.”

For the UK, Ansari said property prices should find their bottom in the first quarter of 2024 and begin to recover later in the year.