The surge in the US dollar as markets brace for a series of interest rate increases is likely to heap further misery onto Hong Kong's flagging property market, according to industry watchers.

Rate rises implemented by the Federal Reserve to contain soaring inflation will lure global capital into the US, strengthening the dollar, said Albert Wong, an honorary consultant at AA Horses Mortgage Brokerage Services.

As the Hong Kong dollar is pegged to the US currency, this in turn will end the era of cheap money that has fuelled Hong Kong's housing market for the last two decades and made it one of the least affordable places on the planet to own a home, he said.

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"Hong Kong home prices have in the long term been inversely correlated to the strength of the US dollar," said Wong.

"It will mark the end of the low interest rates enjoyed by Hong Kong in the past 20 years, that have propelled the city's home prices sharply upwards."

In April, the US Dollar Index, used to measure the value of the dollar against a basket of six foreign currencies, surpassed the level of 100. As of Monday it stood at 100.87, the highest since March, 2017.

"A strengthening US dollar and faster-than-expected Fed rate hikes are all expected to negatively impact demand for Hong Kong property in the near term," said Xin Yan Low, portfolio manager on the global property equities team at Janus Henderson Investors, which manage a portfolio of more than US$432 billion.

Hong Kong home prices have increased almost sevenfold since 2003, on the back of low interest rates, strong demand from mainland Chinese and a tight supply of new apartments coming on to the market.

But the market has been battered by the Covid-19 pandemic, which came hot on the heels of the protest movement of 2019. An exodus of people - Hongkongers and expatriates alike - fleeing first the national security law imposed by Beijing then the city's tough coronavirus containment measures, has sapped demand.

Corrections in the stock market and uncertainty around the timetable for a reopening of the border with mainland China have exacerbated the downward trend.

Wong had been conservative about Hong Kong's property market even before the US dollar began to climb. In January, he forecast that home prices would fall by 20 per cent in the next two years.

The average price of a used flat in Hong Kong has retreated by 4 per cent from its peak in September.

Last month the Fed approved a 0.25 percentage point rate rise, the first increase since December, 2018. It suggested it could lift it six more times to 1.9 per cent this year.

"Hong Kong asset prices will lose their appeal to global investors as we are pegged with the US currency. A soaring US dollar will make our property appear more expensive than other neighbouring countries," said Alvin Cheung Chi-wan, associate director at Prudential Brokerage.

Low, however, said in the longer term the low supply of housing in the market, as well as support from mainland Chinese buyers, would help even things out.

"Ultimately, this is a tug-of-war between the longer term outlook for Hong Kong versus the near term headwinds which are caused by a strong currency," she said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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