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  • Dec 19, 2014
  • Updated: 3:24pm
PUBLISHED : Tuesday, 30 April, 2013, 12:00am
UPDATED : Tuesday, 30 April, 2013, 4:28am

US economic recovery could spell disaster for Hong Kong

City's property market would suffer a huge blow from higher American interest rates, which are likely to result if the US recovery progresses


As the writer of the South China Morning Post’s Monitor column, Tom Holland attempts each day to make sense of the latest developments in business, finance and economic affairs in Hong Kong and mainland China.

Last Friday, the United States released data showing the world's biggest economy grew at a weaker than forecast 2.5 per cent annualised rate over the first three months of this year.

With US consumer inflation subdued at just 1.5 per cent last month, the soft first-quarter growth number has bolstered expectations that the Federal Reserve will continue its programme of quantitative easing for the time being at least, and keep interest rates ultra-low until the end of next year.

Whether that's good or bad news for Hong Kong depends on how you see the local property market.

Back in late 2008, when the Fed started its first round of quantitative easing, money began pouring into Hong Kong's financial system.

To get an idea of how much money, look at the first chart. This shows Hong Kong's monetary base, together with the net domestic liabilities of local banks, to give the city's total liquidity stock - a measure borrowed from Morgan Stanley.

As you can see, local liquidity surged during the first round of US quantitative easing, and then surged again last year when the Fed embarked on its third round. As a result, Hong Kong's liquidity stock now stands at triple its pre-crisis level.

All that money had to go somewhere, and much of it went into the property market. As the second chart shows, the government's index of home prices has more than doubled since the start of quantitative easing.

It's not only the residential market that's seen such enormous liquidity-fuelled inflation. As Freya Beamish at the Hong Kong office of Lombard Street Research pointed out in a note published yesterday, although the city's white-collar workforce has grown only 10 per cent since the start of the financial crisis, local office prices have shot up by 88 per cent.

As long as the Fed continues its present policies, the super-abundance of liquidity sloshing around Hong Kong's financial system is likely to support local property prices despite the best efforts of the authorities to cool the market.

But at some point, the Fed is going to wind down the asset purchases that make up its programme of quantitative easing, and sooner or later it will raise interest rates again.

When it does, the excess of liquidity in Hong Kong's markets will begin to drain away, and the city's property market will sink like a stone.

That point may come sooner than most people now think.

Although US first-quarter growth was softer than analysts expected, the weakness was the result of a fiscal squeeze which saw payroll tax cuts expire at the same time as Washington slashed government spending, especially on defence.

This fiscal contraction will continue to weigh on headline growth over the next couple of quarters.

But behind the scenes, activity in the US is picking up. Banks have repaired their balance sheets. Consumers have cut their debts and are spending again. The property market is reviving, with prices climbing back to their highest level since the beginning of 2009.

Meanwhile, thanks to lower unit labour costs and cheaper energy, US companies have regained much of their lost competitiveness. Flush with cash, they are ready to invest.

As a result, Lombard Street Research forecasts US growth to accelerate to an above-trend 3 to 4 per cent rate over the next few years, with the Fed starting to raise interest rates by the end of next year.

That, warns Beamish, will catch Hong Kong's economy in a pincer movement, with higher US interest rates on one side, and decelerating Chinese growth on the other.

With the city unable to react by depreciating its currency, the adjustment will inevitably mean a steep fall in property prices.

How steep is anyone's guess. But judging from experience, a fall of anywhere between 30 and 50 per cent looks quite possible.



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This article is now closed to comments

@IRDHK - 'This time it's different!' Forgive me if I don't leap in when prices are down 20% from current levels...
The other reason this is different than before is:
a) Unlike the past there is not a glut of housing on the market. More likely HK is short about ~40,000 homes in the coming 2-3 years
b) Most people don't have mortgages and know based on past drops it rebounds fairly quickly. Thus at the bottom no-one will sell. Even during 2003 / 2006 even though prices dropped allot there were few sellers. Most just waited it out. With lower debt this time it will be more people holding out. rental rates are also fairly good right now.
c) People who own a second house and in previous drops may have sold high to buy on the low can no longer do this due to the special stamp duty on second homes. They are more likely just to stick with their second home
d) Most professional investors who own 10-20 homes are gone from the market over the last 2 years. these are the people who would have taken their profit and run in the past.
Where the steep downside will come from is unknown.
This foolish man tom thinks that the hong kong government will stand by and watch while the " property market sinks like a stone" is he high on something? At a time when Labourers in third world countries are working around the clock sealing envelopes containing Bank repossesion letters for Americans, he is dreaming of an American Recovery? He would rub his hands in glee if the American situation comes to HK, wouldnt he?
It is a pity , dear editor, that you let such ignorant and ill informed people such as tim holland vent their frustrations here. Perhaps mr holland is waiting to buy a property that he cannot afford so he is creating these fantasies in his head. He is Creating issues out of thin air. At a time when Governments are reducing interest rates , he is saying " the fed will raise interest sooner or later" does he have some inside information? At a time when there is an acute shortage of property , there are three times more buyers than sellers, even after all the curbs, he is trying to tell us properties will drop by 50%.? Wake up mr Holland and go to wherever you come from, you will never be able to afford a tiny flat here.
Based on tom's experience prices dropped 30% to 50% which is probably correct from the past. However with all the intervention HK government has done to slow, stop and start price depreciation then it is not the same as previously. In the 1-2 years prior to previous falls prices have increased +30%. However prior to this fall most likely prices will have already depreciated 10% just due to government intervention. Thus due to the governments prudent measures they have probably cushioned the fall to between 10% to 20% area.
Just anyone holding their breath for a 40% to 50% drop will have a very long time to wait as based on experience and what the government has done it probably isn't going to happen.
So once prices drop 20% I recommend if you have never owned a home before then you should jump in. (more realistically this will be the bottom of the market)
Its been done several times before....HK is not Mainland China. If the market sinks, then the market is working...investors shoudl already knwo the big risks theuy are making nowadays.
Housing should be affordable to all who wish to own their own home. First time HK resident buyers have been kept out of the market by deliberate squeezing of land supply by Donald Tsang's and Henry Tang's rotten policies in collusion with viciously greedy property tycoons and banks. It is only common sense that printing truck loads of money leads to inflation and one way to curb it is higher interest rates, which must happen sooner or later. Given that Hong Kong property prices are still grossly inflated to sometimes 200% of what they should be, why not let the market fall? Many people who bought at super high prices are speculators - especially those who laundered huge sums of cash from China, and who should sympathise with them?
Indeed. The only thing we know for sure about housing markets is that sooner or later they revert to an affordability ratio mean. There is not a housing market in the history of the world that has managed to sustain a rate of price increases or a price level that is seriously out of whack with underlying real income growth/levels over longer periods of time. And yes, Hong Kong won't be any difference this time. Prices may stay high for multiple years still, but we will either have to see extraordinary economic growth, massive wage-led price inflation or a severe correction in property prices to return to some degree of affordability of housing in this city.
And where did you buy your crystal ball.................?
I hope not Walmart.................... because those are made in China and might have flaw.
Its easy Captam Dunce....HK dolalr is pegged to US dollar. Most HK mortgages have varriable interest rates. As US dollar interest rates rise to stave off doemestic inflation in the US, so will Hk dollar interest rates...which will mean varriable interest rates on mortgages will go up too. This will double or even quadroople monthly payments if it goes up quickly. Many will see their investments all of a suydden unable to support themselves and will have to sell to avoid default. Lots of sales, means rapidly decreasing prices...its all easy to udnerstand, unless you are from mainland China. Then I can't help you.


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