Jake's View

Low rates, not lack of flats blowing Hong Kong's property bubble

C.Y. Leung appears not to understand that low rates are the real driver in city's property bubble

PUBLISHED : Sunday, 02 September, 2012, 12:00am
UPDATED : Sunday, 02 September, 2012, 4:49am

On the question of affordability, it is clear that, just by looking at statistics comparing, for example, the rate of employment income increase and the rate of property prices increase or, for that matter, rental increase as well, affordability or the lack of it has become more serious.

Chief executive Leung Chun-ying, August 30


I know that some people find it difficult to appreciate just what an enormous impact interest rates have on property prices, but it amazes me that our chief executive, an estate agent by trade, cannot see it.

And yet it appears that he cannot. Whenever he talks of housing he attributes high property prices to a shortfall of available flats and proposes that we start up more public-housing construction, entirely ignoring that the cause cannot be a shortage of supply when we already have 250,000 more flats than we have households.

He has done it again in this excerpt above, taken from a press conference on Thursday. He mentions incomes and prices and says they show that the lack of affordability has become serious. But he says nothing about interest rates, although it is interest rates that have long been the biggest driver in the affordability equation.

Look at the first chart of the Centaline Affordability Ratio for private households. This is a measure of the percentage of average household income taken up by mortgage payments for an average home. It takes account of price, income, repayment terms and, most of all, prevailing mortgage rates.

It says that, despite record-high property prices, there is no serious lack of affordability. There certainly was one in the pre-1998 property bubble, when mortgage payments at one point absorbed more than 100 per cent of household income. But the figure at present is only 43 per cent.

This is no light burden, I agree, but it has been much heavier in the past. The reason it is so light now is rock-bottom interest rates. Interest repayment accounts for the bulk of mortgage costs. Nothing pushes a property market up quite so strongly as falling interest rates.

The reason we have these rock-bottom interest rates is our peg to the US dollar. US monetary policy is under the thumb of a central banker who, if economic stimulants were like medical ones, would find himself behind bars for life as a drug trafficker.

He prescribes nothing but uppers and he has done it now for almost five years, as the second chart of the US federal funds rate shows. Leave alone the bad effects this policy has on the US economy, it has produced an almighty property bubble here.

There is nothing we can do about it. It's like a typhoon. Bolt the windows and just sit it out until it goes away. You can't make that wind stop blowing.

But you can make things worse if you want. In the property market, you can start up an extensive building programme to create an enormous oversupply when the market finally softens. We did that in the run-up to the 1997-98 crash and property prices then fell 70 per cent.

Those who do not learn from the past ... oh, why bother?