HK's sky-high property prices the reward for fiscal prudence
Hong Kong government officials are still warning about the dangers of a property market bubble. Speaking before the Legislative Council this week, Financial Secretary John Tsang Chun-wah insisted 'the risk of the property bubble remains'.
Well, buying a home is certainly expensive. The closely followed Centa-City Leading Index of residential prices hit an all-time high last week. Prices have now risen 86 per cent from the depths of the financial crisis in 2008, and are up by 232 per cent since the dark days of Sars in 2003.
According to property consultancy Demographia, a typical Hongkonger would now have to work for 12.5 years, saving every cent of his or her income along the way, to afford the average city flat.
But still, what we are seeing is not a bubble in the ordinary sense of the word.
A bubble is what you get when speculators - often highly leveraged - pile into the market. They buy solely in the expectation of making quick capital gains, creating a positive feedback loop that sends prices spiralling rapidly higher.
That's not what is happening in Hong Kong. The number of buyers flipping flats back to the market before actually receiving title is minimal: just seven in June, compared with thousands each month at the height of the 1997 bubble.
Nor are buyers highly leveraged. On average in May new mortgage loans were worth just 55 per cent of the underlying property's value, a far cry from the 100 per cent mortgages seen during the US housing bubble.
But if the city isn't seeing a speculative bubble, the other explanation often advanced for the steep rise in home prices - a desperate housing shortage - doesn't stand up either.
According to government figures, last year there were 2.34 million households in Hong Kong and 2.57 million homes. In other words, the city had a housing surplus of 230,000 homes.
Something else is going on. Clearly, a lot of purchasers have been buying flats, not because they need to live in them, nor because they are hoping to make a quick buck by selling them again immediately, but as a long-term store of value.
That makes sense. With consumer inflation running at 4.3 per cent and the interest rate on a one-year time deposit just 0.2 per cent, the return on holding cash is deeply negative in real terms. The stock market, down 13 per cent over the 12 months, is even less attractive.
However, with mortgages available at an interest rate of just 3 per cent, taking your savings out of the bank and putting them towards the down payment on a new flat looks like an attractive option.
But not even that calculation explains why the property sector has seen the heavy inflows of international capital that have played such an important role in propelling prices higher, especially at the more expensive end of the market.
After all, interest rates are low all over the developed world, but only a handful of other markets, including Singapore and London, have seen sizeable investment inflows, and nowhere have property prices risen so far or so fast as in Hong Kong.
It cannot be because international investors are especially bullish on the city's growth prospects. Hong Kong is a geared play on the global trade cycle. With demand from the developed world softening, many economists believe the city could soon face recession.
Yet international interest in Hong Kong property investment remains strong. Part of the explanation surely lies in the relative health of the city's public finances.
Almost alone among developed economies, Hong Kong boasts small government and a net public debt level of zero. In fact the government is sitting on net liquid assets worth almost 70 per cent of our gross domestic product.
In contrast, according to Leigh Skene, of independent economics consultancy Lombard Street Research, most other developed-country governments in the world are insolvent, with liabilities that far exceed the break-up value of their assets.
The only solution to their debt problems, he argues, will be an extended bout of deleveraging and deflation. That will be extremely painful for asset prices in the affected countries. No doubt governments will add insult to injury by seeking to raise tax levels on assets into the bargain.
As a result, cashed-up Hong Kong looks like a rare safe haven in uncertain times.
No wonder capital has flooded into the city's property market. High prices are part of the price we pay - or, if you prefer, the reward we get - for our government's fiscal prudence.