Hong Kong real interest rates may evolve

It may be time to re-think them.

Even if current real interest rates in Hong Kong remain negative, a new way of looking at them should be taken into consideration, suggests an analysis.

According to a research note on Hong Kong property by Barclays, factors such as the retail sales deflator and housing rents should be considered in re-thinking the possible evolution of real interest rates in Hong Kong.

A new way of considering real interest rates is in line with the report's observation that the Hong Kong property market has various drivers and statistics that influence it, but real interest rates have historically demonstrated the strongest relationship with home prices.

Here's more from Barclays:

Intuitively, this is not hard to understand as negative real rates penalise savings. Over the past 30 years, whenever real rates are negative, home prices rise and conversely whenever real rates are positive, home price fall.

Although current real interest rates remain negative, in this note, we take an in-depth look into how real interest rates in Hong Kong may evolve, considering such factors as the retail sales deflator and housing rents.

With the US possibly starting to raise rates in mid-2015, the combination of slightly higher nominal rates and slightly lower inflation could see the return of positive real rates and an accompanying switch from real estate back to cash.

At the property stock level, as valuations are now back within one SD of historical norms, we no longer see the Hong Kong developers and landlords’ risk-reward profile as attractive.

We advocate a defensive approach to the sector with Cheung Kong (CK) and Hang Lung Properties (HLP) as our only OWs.