Hong Kong property hits a wall

Recent market turmoil and a poor land auction result  have pushed the consensus view of Hong Kong property towards a possible correction of as much as 10%.

At the same time, some hope that renewed US stimulus will flow through to Hong Kong real estate prices.

I take issue with the view that US quantitative easing will weaken the $US and thus property prices in Hong Kong will go up through its $US currency peg.  Let’s get a few facts straight.

As I have previously pointed out, the ups and downs in property prices have been very much correlated with what’s happening with money supply, not the weakness of the US dollar by itself (even though it has some role to play). Here is a chart of the money supply stock in Hong Kong dollar terms:

Money supply in Hong Kong did not rise after the second round of quantitative easing was announced and implemented.  In fact, money supply has been largely flat for the past 7 or 8 months.  It was, if you like, the expectation of quantitative easing which drove money in, not quantitative easing itself.

The reason for a flat money stock is, in my view, that China has been tightening monetary policy. Companies from China that have failed to borrow money from Chinese banks can borrow cheaply from Hong Kong then convert into Chinese yuan, and find ways to transfer the money back into China.  As a result, the monetary condition in Hong Kong is not wholly dependent on what the United States is doing, but increasingly on what the People’s Bank of China is doing.  This is the reason why we didn’t see much of a surge in money stock after the second round quantitative easing, and this is why mortgage rates have been rising even without the Fed raising interest rates.  It’s spillover from monetary tightening in China.

Now the Fed is committed to keep rates low through mid-2013, and quantitative easing might be on the table should growth in the US slow, which is likely in my view.  Does it mean that it’s time for property owners party?  Based on what we see above, the answer is no, not just yet.

One important factor will be what the Chinese policy makers that have helped tighten monetary condition in Hong Kong for 10 months without knowing it will do next.

The Chinese economy has to be slowed very significantly in order to contain inflation.  Unfortunately, even though policy makers said early this year that price stability is the top priority, they have effectively given up on that front as growth has slowed.  One is tempted to conclude that Chinese policy makers have engineered a soft-landing, but the reality is that the big plane of the Chinese economy has not even come close to the ground.

Given continued high inflation, policy makers are unlikely to meet their 4% inflation target even though inflation will fall somewhat in the latter part of the year.  That means that while further tightening is less likely at this point, easing of monetary policy is just as unlikely.  As such, the monetary condition in Hong Kong will remain somewhat tighter than property owners might like.

Another factor is the macro risks we are currently facing.  Economic growth in the United States and Europe is anaemic, and there are important structural problems yet to be tackled by the latter.  China might have avoided a hard-landing because of its lack of courage, but there is nothing to stop that from happening if the developed economies contract again.  Indeed, we have just seen a bizarre drop in GDP in Hong Kong in the second quarter vs. the first quarter, a reminder that things may be more gloomy than the consensus are expecting.

In the event of extreme of market volatility emanating from macro risks, I expect a tightening of liquidity as money flow out of Hong Kong.  That is the low-probability-high-impact event that I highlighted previously which would produce huge damage to the Hong Kong economy as well as property market. In that event, the blow will be much more serious than a 10% correction, something that is not foreign to the history of the Hong Kong property market.


  1. Sandgroper Sceptic

    Great article.

    Hong Kong property market reacts very quickly. When I lived there I saw the boom and bust of 96-98, in late 1997 and early 1998 property fell by 70% in a year! Truly staggering falls and many owners had negative equity. However once the peg was successfully defended, and the Government stopped releasing too much land, prices recovered. It is a very different market to Australian mainland cities.

  2. Market went up last week.


    And still no sign of a correction. Yields still attractive on residential property (much better than Australia) and interest rates are low – I pay less than 1% currently.

    And there is essentially NO vacant commercial property in central Hong Kong.