Hong Kong private home prices rose 0.19% in September, a second straight monthly gain, while rents climbed to another record, official data released Wednesday showed. The Rating and Valuation Department's price index for all classes of flats reached 320.8, up from 320.2 in August and 9.3% higher than a year earlier.

For investors, the numbers describe a market that has stopped surging but has not turned. Prices are up 7.1% since December, the strongest run in years, yet the index remains below its June high of 323.4 after a dip in July. Rents, which feed directly into yields for landlords and real estate investment trusts, keep setting new highs.

Small flats stall as large homes gain

The September gain came mainly from bigger units. The index for flats of 100 to 159.9 square meters rose to 293.0 from 290.4, and homes of 160 square meters or more rose to 286.8 from 285.4, according to the department's provisional figures.

The smallest flats, under 40 square meters, held at 340.4 for a third month. That segment led the rally earlier in the year and is still the most expensive relative to its 1999 base, but it has not moved since July. Flats of 40 to 69.9 square meters, the market's largest category, edged up to 312.6.

Rents tell a firmer story. The department's territory-wide rental index rose 0.47% in September to a record 212.2 and was 6.2% higher than a year earlier. Rents are up 5.8% in the first nine months.

Derek Chan, head of research at Ricacorp Properties, told the newspaper that executives at foreign companies were joining incoming professionals in the rental market. He said gross rental yields of about 3.5% for small flats and more than 2.6% for other sizes compare with an effective mortgage rate cap of 3.25% at most major banks, which makes buying look better against renting. Chan expects rents to rise another 1.3% in the fourth quarter and prices about 1.5%, which would put the full-year price gain at 8% to nearly 10%.

Developers have been selling steadily. New-home sales reached 1,700 units in the first 27 days of October, the third month in a row above 1,000, according to research by Hong Kong Property Services cited by The Standard, which said the monthly total could approach 2,000.

Mortgage demand cools in September

Bank data point to a slower pace of buying in the resale market. Mortgage applications fell 10.5% from August to 7,560 in September, the Hong Kong Monetary Authority said Friday. Approved loans slipped 1.1% to HK$31.8 billion, and loans actually drawn down fell 22.8% to HK$25.3 billion.

Approvals for primary market purchases fell 6.8% to HK$8.5 billion, and those for secondary market deals dropped 5.7% to HK$14.4 billion. Refinancing went the other way, rising 14.6% to HK$8.9 billion. The share of new loans priced off the Hong Kong interbank offered rate fell to 52.7% from 57%.

Credit quality remains sound. The mortgage delinquency ratio stood at 0.11%, the HKMA said. The number of mortgages in negative equity fell to 3,819 at the end of September from 4,356 at the end of June, and their value dropped to HK$17.3 billion from HK$19.6 billion. Most of those loans are bank staff loans or loans under the mortgage insurance program, which carry higher loan-to-value ratios.

HKMA warns buyers on rates

Borrowing costs are the main risk to the recovery. The U.S. Federal Reserve raised its policy rate in September for the first time in three years, and the HKMA lifted its base rate to 4.25% under the currency peg, The Standard reported at the time. Major lenders including HSBC, BOC Hong Kong and Hang Seng Bank kept their best lending rates at 5% after that move.

The Fed then held rates at 3.75% to 4% on Oct. 29, Hong Kong time. In its response, the HKMA said U.S. rate moves were subject to considerable uncertainty and that a persistent gap between Hong Kong dollar and U.S. dollar rates could lead the local currency to ease gradually through carry trades. It told the public to manage interest rate risks carefully when buying property or borrowing.

The department's provisional figures for October, which will capture the month's new-home sales and the period after the Fed's latest decision, are due next month.