July opened with enthusiasm at the news of Hong Kong’s residential property transactions jumping more than 50 percent in June from a year earlier. Of 7,271 sale and purchase agreements for all building units received for registration in June, Land Registry data indicates 5,955 were for residential units with the value of transactions surging 77 percent year-on-year to HK$61.1 billion ($7.8 billion). Hong Kong’s June home sales were up 16.7 percent from May, registering a 54.4 percent hike from a year ago.

At the same time, for the first half of 2025, the number of sale and purchase agreements submitted for registration for all building units was 36,848 — an increase of 12 percent compared with the second half of 2024 and 5 percent compared with the first half of 2024.

According to Bloomberg, the total number of homes sold exceeded 5,000 for a fourth straight month, the first such occurrence since late 2021. Falling interbank rates contributed to this, as did pricing sensitive to a home market contending with the worst slump in nearly a decade. But the prima donna of the act has remained the volatile US dollar to which the Hong Kong dollar is pegged.

On June 26, for the first time since 2023, the Hong Kong Monetary Authority (HKMA) intervened to defend the Hong Kong dollar. At that time, the HKMA sold US dollars for HK$9.42 billion as the weak-side convertibility undertaking (CU) of HK$7.85 to $1 under the linked exchange rate system (LERS) was triggered. When HKD weakens (7.85 HKD/USD end of the 7.75-7.85 trading band), the HKMA sells USD and buys HKD. Conversely, when HKD strengthens, it buys USD to contain appreciation. By July 4, the HKMA had intervened multiple times, purchasing HK$59.07 billion in all.

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But before that in early May, the HKMA had to step in as the strong-side CU was triggered several times, resulting in total inflows of HK$129.4 billion. The resulting abundant HKD liquidity pushed down local interbank rates, making mortgages relatively attractive, leading to a spike in home sales. The one-month Hong Kong interbank offered rate (HIBOR), a reference rate for mortgages, veered from a high of more than 4 percent in late April to a three-year low of 0.52 percent around mid-June.

It has also been reported that for the first time since the current band was instituted in 2005, the authorities had to defend the peg on both sides within just one year.

For sure, the HKD-USD interest rate differential spurred carry trade. Hong Kong’s low interbank rates have historically fueled arbitrage. This involves investors borrowing HKD cheaply, converting it into USD and thereafter, investing in US assets with better yields.

This has contributed to the weakening of the HKD exchange rate. HKMA Chief Executive Eddie Yue Man-wai listed more reasons in a statement issued on June 26: “Furthermore, market demand for HKD declined recently due to a combination of factors, including the peaking of the stock dividend payout season, the currency conversion of HKD proceeds raised from recent IPOs or bond issuances by non-local companies for repatriation, as well as the wrapping-up of the seasonal half-year-end funding preparation.”

Indeed, PricewaterhouseCoopers (PwC) estimates that in the first half of 2025, HK$107.1 billion was raised in Hong Kong through IPOs — a sevenfold year-on-year rise. PwC expects the momentum to continue into the second half of 2025 with “total fundraising projected to exceed HK$200 billion”.

It is estimated that by July 7, the aggregate balance — the key gauge of cash in Hong Kong’s banking system — will fall to HK$114.54 billion. To give an example of how rapidly liquidity expanded, after the HKMA started intervening in early May, an injection of HK$129.4 billion caused the aggregate balance of the banking sector to almost quadruple “in a matter of few days from HK$45 billion to HK$174 billion”.

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Understandably, an abundant supply of Hong Kong dollars caused short-term interbank rates to decline sharply. If we look at the impact on the property market, as the HKMA intervenes with HKD weakening, leading to a liquidity crunch and higher HIBOR, borrowing costs could climb too. While homeowners could come under pressure, potential buyers are likely to hold back. It is reported that in early July, the tranche of interventions pushed the one-month HIBOR rate to its highest level since mid-May.

If we refer to HKMA data, mortgage loans approved in May increased by 5.3 percent from April to HK$26.6 billion – the highest in a year. Crucially, mortgage loans for refinancing led the charge, rising by 33.7 percent to HK$3 billion in that month.

While geopolitics continues to put pressure on currencies and the cycle it triggers, the rebound in Hong Kong’s home sales should be viewed in perspective. It would be prudent to heed the HKMA’s caveat issued back in May, “Going forward, uncertainty will cloud the trajectory of the Hong Kong dollar exchange rate and interest rates”.

The author is an award-winning English-language fiction writer and current-affairs commentator.

The views do not necessarily reflect those of China Daily.