Risk of a housing bubble? It's already with us

PUBLISHED : Tuesday, 27 March, 2012, 12:00am
UPDATED : Tuesday, 27 March, 2012, 12:00am


'On my radar screen another risk has emerged. That's the risk we encountered back in 2009: the renewed risk of a housing price bubble. The city's low mortgage rates are hugely negative. Lots of people have come to the conclusion that they buy bricks and mortar, tangible assets, and could preserve their purchasing power.'

Norman Chan Tak-lam
Our pretend central banker
Bloomberg, SCMP, March 24

Let's not install Norman's radar screen down at the airport. I'm not flying if they do. Not only is it beamed the way we came rather than the way we're going but it's on the blink even then.

Take that bit about the risk of a housing bubble in 2009. As the first chart shows you, we started 2009 with the property market pushed well back by the American financial crisis of 2007/08. The year then progressed with a steady recovery in prices. If that's a risk, may we have more such risks. I can't see why this troubled the Hong Kong Monetary Authority.

And as to there being a risk of a property bubble at the moment, no, there is no such risk. There is only the fact of a property bubble. It has gone past the risk stage. It is here with us right now.

But could it get even frothier than it is right now?

Yes, it certainly could. Notice from the chart that not only have prices on average taken a bit of a breather since the middle of last year but, even at their highest last year, they were only about 9 per cent higher than at the peak of the 1997 property bubble. This is not much of a gain for 14 years during which gross domestic product per capita rose by 27 per cent.

Notice also the evidence of the second chart. An affordability index measures how burdensome home prices are after taking into account all of the things that influence carrying a mortgage - price, average household income, mortgage interest rates, required down payment, mortgage life, etc. The lower the number on the index, the more affordable.

Centaline's affordability index indicates that home prices are still more than twice as affordable as they were at the 1997 peak. On this basis we still have a long way up before the market peaks.

But it is still definitely a property bubble and it is so for the reason Norman cites, to wit that, more than anything, prices have been pushed up by ultra-low mortgage rates.

It used to be said that the definition of political stability is money at 6 per cent. Money at 3 per cent, however, is a distortion and a cheat by irresponsible central bankers of people who save money.

But there are two things that I would say to Norman about this. First, don't be too quick to disparage bricks and mortar as a store of value. On most occasions property makes an excellent one. Paying off your mortgage and owning your own home is generally one of the best investments you can ever make. Have faith that a proper balance in financial matters will come back to us again. It inevitably will.

The second thing, Norman, is that you must remember you are not really a central banker. You are a currency board technician. We surrendered our monetary independence to the US Federal Reserve Board in 1983 when we adopted the peg to the US dollar.

Thus do not make so many prognostications about the ills of the economy. You can do nothing about them. Your hands are tied.

And if you were indeed a responsible central banker (few of them around these days), you wouldn't talk much anyway. You would speak with changes in interest rates, reserve requirements and market operations. That's the language finance understands best.