Soaring homes prices - interest rates hold the key

The Hong Kong Monetary Authority - the city's de facto central bank with the added responsibility of a banking regulator - has laid down further restrictive mortgage lending rules that have been widely sniffed at by developers and their agents as nothing more than window dressing.

But these rules, mild as they are, appear to have given banks an excuse to back away from the fierce fight for market share in the mortgage lending business before everyone gets a bloody nose and a black eye.

Nobody can remember, or cares about, who started the fight which has seen ever thinning mortgage loan margins offered by the combatants to woo homes buyers. Not anymore.

The two biggest lenders - HSBC and Bank of China (Hong Kong) - have widened the spreads of new mortgage loans, albeit by a tiny margin. Other banks, including Standard Chartered and the Bank of East Asia, have followed suit.

Although the increases are small, resulting in an extra monthly payment of about HK$200 for an average-size mortgage loan, the banks' message is clear. People who're obsessed with buying homes need to realize that the abnormally low borrowing costs that have helped fuel the property market frenzy in the past few years is fast becoming a thing of the past.

The market estimates there's an 80-percent chance of a further 25 basis-point rise in US interest rates at this month's meeting of the US Federal Reserve's policy committee. Hong Kong had kept its rates unchanged following the previous two US rate hikes.

Increased pressure on the exchange rate of the Hong Kong dollar against the greenback will make ignoring another US rate hike untenable. Doing so would spawn a fallout risk from sudden and massive rate surges in future to protect the linked exchange-rate system.

Some property agents are trying to calm homes buyers' nerves by insisting that the limited supply of new apartments will prevent a feared bubble burst. On the other hand, developers are offering zero-deposit mortgage loans through their finance company affiliates to prospective buyers in a rush to unload their stocks.

Obviously, they don't want to be saddled with piles of unsold homes if and when the bubble bursts. And, it could take nothing more than a rates hike to send the massively overheated market into a tailspin.