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  • Dec 23, 2014
  • Updated: 7:07am
PUBLISHED : Thursday, 18 October, 2012, 12:00am
UPDATED : Thursday, 18 October, 2012, 4:47am

Yes, the HK$ peg is to blame, but the alternatives are worse

Cheap money is behind high property prices but any moves to fully float or manage the currency like Singapore do have their pitfalls

Property prices are an eternal obsession with Hong Kong's inhabitants.

Even so, Monday's Monitor column examining some of the reasons why we can expect the home prices to continue setting new records broke new ground.

Among the responses it elicited from readers was one tightly reasoned e-mail from a prominent local financier which ran to more than twice the word count of the original article.

In a nutshell, our reader argues that increasing the supply of housing will do nothing to bring down prices. With mortgage rates as low as 2 to 3 per cent, building more flats will simply encourage more buyers to invest in the property market.

The real problem, he insists, is Hong Kong's currency peg to the US dollar, which forces the city to import US interest rates, whether the local economy is in step with the US business cycle or not.

Right now that means Hong Kong is replicating the Federal Reserve's ultra-low interest rates, even though our economy is relatively strong and our property market is booming.

"With the peg, I think everyone would agree that the negative effects are crystal clear and causing many social and economic problems," our reader writes. "Can our Hong Kong property market withstand three more years of low interest rates and double-digit price increases annually?"

The answer, he argues, is for Hong Kong to ditch its 29-year-old exchange rate peg to the US dollar in favour of a currency regime that would allow the city to run higher interest rates, so constraining the property market.

There is nothing new about calls to get rid of the peg. The problem is deciding what to replace it with. The most common suggestion is that Hong Kong should simply peg its currency to the yuan instead of the US dollar.

But there are difficulties. Even though the Chinese currency is not fully convertible, the Hong Kong Monetary Authority would have no problem maintaining the Hong Kong dollar in a set trading band against the yuan.

The trouble would be interest rates. The lack of arbitrage opportunities would prevent Hong Kong from simply adopting mainland interest rates. And the offshore yuan market is too small and illiquid to provide a reliable benchmark yield curve for the much bigger Hong Kong dollar market (see the first chart).

Then there's the Singapore solution: a managed float under which the monetary authority steers the local currency higher or lower in an attempt to keep local inflation, asset prices and interest rates at moderate levels.

It sounds great. The problem is that property prices in Singapore have shot up almost as much as in Hong Kong over the past three years (see the second chart), despite a steady appreciation in the Singapore dollar.

In fact, the appreciation of the currency may have exacerbated Singapore's property boom by encouraging capital inflows.

"The policy has failed," says one Singapore-based economist, "but don't quote me on that."

Finally there is the option our reader would prefer: a full free float of the Hong Kong dollar, which would allow the HKMA to set interest rates appropriate for the city's domestic economic conditions.

That might rein in the property market. But Hong Kong's government and businesses would hardly welcome the inevitable exchange rate volatility that would follow.

Initially, the Hong Kong dollar would shoot up in value, reflecting both its current perceived undervaluation and the higher interest rates that would be on offer. But before long the appreciation would erode the city's competitiveness as a service centre, leading to a slowdown in the economy, widespread job losses - and very likely a collapse in the property market.

There's no way the government is going to risk that. So for the time being, like our reader, we'll just have to go on complaining about how expensive Hong Kong property prices are.



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I don't think job losses is a bad thing. The USD peg punishes all 7m citizens of Hong Kong. Our finance and banking sectors might become only a secondary hub and people will need to reinvent themselves - just like how Hong Kong reinvented itself after losing all its manufacturing. Being in the banking industry myself, my job will be in jeopardy, but this is a very short-sighted and selfish reason to not drop the peg.
A currency peg is a game of chicken. When the currency is undervalued, the question is, how much pain will policy makers be willing to inflict on their economy to keep the peg?
The greater the pressures against the peg, the harder the adjustment should it eventually be abandoned. And the more likely it is to be abandoned, the greater the pressures that build up, eventually forcing its demise. Any external signs of weakness are therefore costly. The finish line is a return to "normality, sometime".
Singapore declined the outright bet with the panic-stricken markets, and calculated that it would eventually lose, therefore a gradual adjustment would weather the storm better. They still have a property/currency bubble, but also have a semi-autonomous monetary regime to address issues along the way. And it is tiny, but isn't that a divergence of the property curves we are starting to see?
Hong Kong has decided to tough it out, which is why you will hear any reason under the sun for the property price issues, other than the real one. And lots of spurious assertions of how a large depreciation of the currency constitutes "exchange rate stability". Even discussing the peg issue in public, if you are a former policy maker, is reprimanded.
But with the US now stating that monetary easing will continue for years to come, and China believing its rate is pretty fair, you have to ask yourself: did HK really believe it would go on for this long, when it put its bet on the table?
The US-Dollar peg is one factor but not a major reason of HK's skyrocketing property prices - and inflation; the major reasons being supply-demand and influx of "hot" money from outside. Given US's printing of money, US Dollar has in effect depreciated vis-a-vis other currencies; therefore the HK Dollar, giving rise to inflation making HK one of the most expensive cities in the world. It is high time that HK Dollar needs to be unpegged as conditions from the time when the peg was established have changed. If anything, it may be more closely linked to Renminbi, given HK's close link to China's economy and currency.
In the past 20 years, the Hong Kong property market has seen corrections of -26%, -50%, -45% and -27%..... I don't see any reason why 3-4 years from now we shouldn't expect something similar. Affordability is currently being maintained by superficially and ridiculously low interest rates, and ever-extending mortgage durations (to the extent that ON AVERAGE new mortgages are now 25.5 years, versus 19.9 years in 2007). If rates normalise in 2015 and normalise fast, coupled with a sharp increase in supply, it could get ugly.
Agreed mostly! Remember SARs? We were pegged that time too! Interest rate is only one element of the rise. In fact if you believe in forward looking in stock market that price should reflect the future but not the pass. So the direction of interest rate is going to be up in the future and the implication of property price is going down. On Peg, Yuan is not floated yet and euro is not stable, what choices do we have?
Do not confuse currency policies with property prices. There are many reasons why property prices surge, and I'm sure Tom knows the primary reason why this is the case in HK - a market that is skewed towards extreme capitalism - dominated by the biggest property companies and a government that relies on high land prices for the bulk of its revenues.
Contrast that with Singapore. While prices have surged in Singapore as well, unlike Hong Kong, 90% of households in the island nation own their homes. So few Singaporeans are at the mercy of landlords. The state plays an active role in providing subsidised housing of good quality (some with condo facilities in a public-private partnership) at different price points for sale to Singaporeans only. And these are still relatively affordable, and will almost automatically grant buyers at least S$150,000 equity on average to the buyers once they are eligible for sale in the secondary market in 5 years time. A fair number of these sellers often upgrade to private property. There is far more scope and diversity in treating different segments of property buyers in Singapore than in HK. In HK, it's more one-size-fits all, and that's mighty silly in a city that claims to celebrate diversity. So instead of speaking to anonymous economists, perhaps Tom should take time to revisit his old haunts here and learn about the Lion City's public and private housing policies. Who knows, HK may just find the solution to its nagging property woes.
Totally agreed the point HK government is using land and stamp duty income to finance its operations therefore taking away factors such as currency and interest rate, government also try to interfere or use a high-price-land policy to control HK. That's why HK government has not been against the high price or the strategy deployed by developers, government's major biz partner, to find ways to push up the property prices to keep a good cash flow for the government. These policy won't be able to change until HK finds a better way to finance its government.
stop the foreign invasion of property speculation and it will halt the bubble
you can allow them in later if really necessary
many other countries do this successfully , so this is not a new idea


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