The recent deterioration of the situation in the Middle East is not only a humanitarian crisis but has also evolved into a "gray rhino" impacting global capital markets. With the escalating power struggle between the US, Iran, and other major countries, geopolitical uncertainty has become the biggest threat to investor confidence in Hong Kong's property market.
As the Middle East conflict escalates causing oil prices to soar above $100 per barrel, this will trigger imported inflation globally. For buyers who have been anticipating a rate-cutting cycle from the Federal Reserve, this will be a devastating blow.
Resurgence of inflation will force central banks worldwide to maintain high interest rates, and there is even a risk of a reversal 
from rate cuts to rate hikes. Once Hong Kong banks raise their prime lending rates (P), buyers' mortgage interest expenses will increase, leading to a decline in property returns. This will not only have a negative psychological impact on property buyers but will also significantly increase their financial burdens.
In fact, psychological expectations are often more destructive than actual data. Under the shadow of war, funds tend to flow into safe-haven assets settled in USD. Recently, some banks have raised their three-month US dollar fixed deposit rates to 3.8%. With a prevailing mentality of seeking profit while avoiding risk, funds flowing into the illiquid property market are naturally decreasing.
While there is still genuine demand in the market, this risk-averse sentiment will begin to slow down the pace of market entry. Before the situation in the US-Iran conflict becomes clearer, savvy buyers understand that hasty entry could expose them to the dual risks of fluctuating property prices and rising mortgage rates.
In summary, the Hong Kong property market is currently wedged between external and internal challenges. Rising geopolitical risks, coupled with subsequent inflationary pressures and rising interest rates, will hinder the market's gradual recovery.
Soaring oil prices typically support a strong US dollar, putting downward pressure on the RMB. To stabilize the exchange rate, China may strengthen capital controls, significantly increasing the difficulty and cost for mainland buyers to transfer large sums of money to Hong Kong to pay for the downpayment. If this happens, mainland buyers, who have been the pillar of the property market, may suddenly disappear, leading to a deep market correction.
