How ending the peg could hit property prices

PUBLISHED : Thursday, 14 June, 2012, 12:00am
UPDATED : Thursday, 14 June, 2012, 12:00am


Flat prices in Hong Kong may fall if the currency is depegged from the US dollar, property experts say.

'The Hong Kong dollar is expected to see an upward trend if it is depegged. And that will hit demand for assets,' said Shih Wing-ching, founder of the Centaline Property Agency.

The Hong Kong dollar has been pegged at HK$7.80 to the US dollar since 1983, depriving the Hong Kong government of monetary policy flexibility to counter cyclical economic movements and giving it little room to ease surges in asset prices. This has prompted calls for the local currency to be depegged, which the government has always resisted.

'Buying desire in the Hong Kong property market is strong partly because our currency, due to the peg, is weakening against other currencies such as the yuan. Buyers opt for property assets, which are believed to be more reliable,' Shih said.

'Now, as Hong Kong's economy is better than that of the US, its dollar will shoot up once it is depegged from the US currency. That will harm investment demand for properties.

'The nominal values of properties will drop.'

Another disadvantage of Hong Kong's exchange rate mechanism is that it forces local interest rates to follow those in the US.

The low mortgage rate of 2.2 per cent is seen as one of the main triggers for the rise in price of properties in Hong Kong over the past few years.

'Once it is depegged, interest and mortgage rates will rise according to the city's current economic performance. Hong Kong will see pressure on prices during this rising interest rate cycle,' Shih said.

Shih said there were many factors affecting the movement of property prices. 'But depegging is definitely a negative factor on the industry.'

Having said that, he supported the idea of ending the peg. 'We should not be pegged to a weak currency. We should be pegged with a stronger one.'

Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority, said on Tuesday that property prices had been influenced by land and housing supply, and the enthusiasm of mainlanders for buying flats, rather than the monetary mechanism that links the Hong Kong and US currencies.

Buggle Lau Ka-fai, chief analyst at Midland Realty, said the recent fall in the value of the Hong Kong dollar against the yuan had attracted a large number of mainland buyers into the local market. The Hong Kong dollar's exchange rate against the yuan was 0.851 yesterday.

'With the strong yuan, mainlanders feel like they are getting a 20 per cent discount when they buy Hong Kong property,' Lau said. 'But if the Hong Kong currency becomes stronger, mainland buyers will lose their buying interest.'

Midland Realty figures show that mainlanders accounted for 34.3 per cent of sales in the New Territories by value in the first quarter, up from 28.9 per cent from the previous quarter.

During that period, the number of mainland investors buying homes on Hong Kong Island and in Kowloon declined, but they still accounted for 42 per cent and 38.1 per cent, respectively, of buyers.


The rise in property prices from early 2009 and April this year, according to Financial Secretary John Tsang Chun-wah