Hong Kong officials, who have struggled in vain for three years to slow the growth in home prices, are about to get their wish as the city's biggest banks raise their mortgage rates.
Prices could fall by as much as 20 per cent in the next two years after lenders including HSBC, Hong Kong's biggest by assets, and Standard Chartered raise home loan rates by 25 basis points in response to tighter risk rules, Deutsche Bank said.
The Hong Kong dollar's peg to the US currency has kept interest rates at near record lows, underpinning a more than 110 per cent rise in home prices since the start of 2009.
Repeated attempts by the government since 2010 to stymie escalating housing values, alongside an outcry about affordability, have failed due to low mortgage costs and a property buying spree driven by Chinese from the mainland.
"You have this pile of measures plus higher interest rates; this will be a big challenge for the market," said Buggle Lau, chief analyst at Midland Holdings, the city's biggest publicly traded real estate agent, which predicts as many as a third of real estate agent branches in Hong Kong will close.
Head of government Leung Chun-ying has already doubled stamp duty on all property transactions of more than $HK2 million ($246,600). The Hong Kong Monetary Authority has told banks to maintain the risk weighting for new home loans at a minimum of 15 per cent to help protect them against a drop in home values.
HSBC was the first among Hong Kong's lenders to increase rates from March 14. Its mortgages linked to the best lending rate rose to between 2.85 per cent and 3.15 per cent; Standard Chartered's are between 3.1 per cent and 3.5 per cent.
The rate rises may finally dampen house prices, which have risen by 16 per cent since Leung was sworn in on July 1 last year, an index compiled by Centaline Property Agency shows.
"With the new government measures, the potential further rises in mortgage rates, and the expected increases in new supply in the medium term, we expect property prices to show larger corrections," the Deutsche analysts wrote in a report on March 13.
An average-sized apartment on Hong Kong Island costs about $HK7.5 million ($925,000) on average. An equivalent one in Manhattan would cost about $670,500.