The stock market can usually be relied on to predict what is going to happen to the economy six months from now.

In recent weeks Hong Kong stock market performance has been dismal. If you are wondering what the institutional investors, who dominate the local bourse, are doing - then consider the property market.

To be sure, property prices have held firm despite the sharp downturn in the volume of secondary market transactions. This is because property owners, enjoying the exceptionally low cost of borrowing, are in no hurry to sell.

This could change soon, as affirmed by Financial Secretary John Tsang at a press conference on Monday. He said a steady economic recovery could prompt the United States Federal Reserve to raise bank interest rates, which have been kept at abnormally low levels to stimulate growth.

An increase in US rates would push up rates in Hong Kong through the linked exchange rate mechanism. The return to normalcy on the interest rate front, probably in the first half of 2015, could have a profound impact on the Hong Kong property sector.

Property loans, mainly mortgage lending, accounts for a significant portion of the combined assets of the Hong Kong banking system. An increase in bank interest rates would definitely put pressure on the already tightly stretched household finances of hundreds of thousands of home owners who have already found making the monthly repayments on their mortgage loans to be a heavy burden.

Official statistics show that mortgage loan repayments currently account for 58 percent of the total income of an average family - the highest proportion in 20 years. An increase in bank interest rates next year could push that proportion up to 74 percent, according to Tsang.

Naturally, defaults on mortgage loans are rare because the last thing a borrower wants to do is surrender the family home to the bank receiver. Families would be left with little to spend on food, clothing, transport and entertainment.

The reduced spending power of a large group of middle-income families can set off a downward spiral in consumer demand, dealing another blow to a retail sector already reeling from the impact of the illegal "Occupy Central" movement.

More worryingly, rising interest rates could force property investors and speculators to sell their holdings and reduce their debt burden. That could wreck havoc on the secondary market, already suffering from shrinking demand.

In past months, the Hong Kong Monetary Authority has introduced various measures to strengthen banks' resistance to a potential property crash and issued numerous directives to remind banks that property prices can go down too.

Stock investors obviously don't need any official reminders to be wary about the possible impact of higher interest rates on the property sector.

(HK Edition 12/02/2014 page1)