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  • Dec 19, 2014
  • Updated: 1:22am
Jake's View
PUBLISHED : Thursday, 24 October, 2013, 2:07am
UPDATED : Thursday, 24 October, 2013, 1:35pm

Only higher rates will ease property prices

While US interest rates remain low, Hong Kong's stamp duties are unable to do more than shift the burden of pricey flats onto the poor

Hong Kong's home prices should drop by more than 10 per cent from their current level this year and by more than 20 per cent next year, according to investment bank Jefferies.

SCMP Property, October 23

How strange a thing, a New York bank that did not look at the world from the perspective of New York. Rarely have I seen the like.

And yet Jefferies would have done better on this occasion to have taken that narrow view. It would then have noticed that there is little talk in New York at present of a "tapering" of "quantitative easing" (translation: slightly less negligent monetary policies). The latest economic data has been poor. Interest rates will stay ultra-low.

I cannot see how a banker would miss the implications. Low interest rates in the US have pushed up financial asset prices around the world, in no sector more than in real estate and in no place more than an economy with a currency formally linked to the US dollar.

How is it possible then to accept that US interest rates will stay low and yet declare that Hong Kong property prices will fall 10 per cent over the remainder of this year alone and a further 20 per cent next year? Is Jefferies telling us that the talk in New York is wrong?

I know there is talk in Hong Kong too of a slowdown in the property market. A good number of people are now singing the government line that punitive stamp duties have restrained prices.

I am not so sure, and neither is the data. Certainly the government's own official residential property price index indicates no sign of correction, as the chart shows. The latest data only goes up to August but the stamp duties should have bitten into prices long before then.

Further analysis suggests that the focal point of the property market has moved from Hong Kong Island to the New Territories and from larger flats to smaller ones. The talk of weakening prices may therefore reflect only the personal circumstances of prominent talkers who live in big Hong Kong Island flats.

And if this is indeed the trend, then the impact of the new stamp duties has been a perverse one. They may have trimmed prices, but in the wrong sector of the market. They have taken the pricing pressure off the rich and added it to those already overburdened poor who want to buy a first home. The very people who were expected to benefit have been hit the hardest.

I think it was inevitable that this would happen. The stamp duties assume that the property fever stems only from an excess of glinty-eyed greasy speculators. Sting them and they will go away. Prices will then come down.

It is a false notion and events are proving it so. The culprit is interest rates and they act like the floodgate of a dam to water behind that dam. Open the floodgate too much, as is done with money when interest rates are pushed too low, and you will get that flood downstream.

Imposing higher stamp duties then is like trying to erect sandbag barriers in the way of the flood. You may keep a few cherished spots dry but just as much water will flow downhill as with no sandbags. All you do with sandbags is redirect the flood a little. This helps some people but makes things worse for others.

The only real solution is to close the floodgate. Unfortunately, because of the peg, we cannot. Therefore we reach for ineffectual sandbags instead.

I don't expect our bureaucrats to understand this but I am surprised that a New York bank can't figure it out.



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From a global perspective property prices are fair in Hong Kong. Not particularly high unless you live in Mid-Levels etc.. 50% of HK residents live in government housing.
I bet if you went to any major city in the world and took away the cheapest of 50% of houses then you would have prices much higher than Hong Kong. NY, Sydney, Vancouver, London, Tokyo etc.. all have their top 50% of houses costing far more than Hong Kong.
A great analysis Jake, and quite concerning for Hong Kong. Such a strong correlation with QE, and no end in sight at present. A new startup www.spacious.hk has been analysing house prices, and they have yet to see any meaningful softening due to the SSD, BSD and other controls imposed. You say the government can't close the floodgate due to the peg, but are there other alternatives you would suggest? An example I can think of is a "property ownership tax" such as in Australia + other Asian countries. With sensible exemptions such as primary place of residence, this could dampen investor speculation and help make property more affordable for locals. Keen to hear your thoughts?
When the supply of money exceeds available goods and services, prices rise. When it's vice versa, prices fall. Since huge sovereign debt is making the Fed keep interest rates low so the USA can afford to service the debt, interest rates aren't going to rise any time soon and the US Govt. keeps printing inflationary money. So the only other solution in HK is to increase the supply of property.
Don't forget that the root cause of the current housing shortage and astronomical prices was Donald Tsang's 2004 deliberate policy decision to force up property values by stopping Government land sales and cancelling the Home Ownership Scheme.
the root cause of the housing "shortage" was the 1863 decision to charge land premia up front rather than as an annual rent
Er, you mean mainly the cities where Chinese speculators' money has forced up property prices?
You would lose your bet. Hong Kong residential property is the worst value for money in the world and the least affordable in proportion to average income.
Agree, might be good for the original poster to check the affordability index for Hong Kong.
My respond to the news ‘Beijing to construct affordable city homes’ in today's Property Section:
A very wise move in creating a sustainable society. Rich and poor depend on each other. I see a truly harmonious society is begin to evolve. Biejing may have taken a leaf off from New York City in the concept in having affordable housings within the city.
Hong Kong should stop building luxury flats even after the extra stamp duty and tax are lifted. Build affordable housing instead even in prime location. I remember people decry of North Point Estate of its waterfront location and demanded it to be torn down. The government oblidged.
To respond to JVDK:
Yes, The flood still flows down stream (not a good parable). The government’s measure has stopped the rise of property price. But nothing is being built for the affordable housing which was the impetus measure by the government in the first place. The housing for local occupancy is unresolved as ever.

Severity of government’s suppressive measures reflects
the strength of upward pressure on asset price inflation
Water behind the dam is the culprit, not interest
which can’t rise under megatons of ever-increasing liquidity
that, while needed to flush the sluggish economy, is trapped
in the one-way super-capitalist course from the growing contingents of
the disadvantaged, under-employed and unemployed to the well-off
From what can be seen in the offing
shale gas, if its opportunities are real and actualizable,
may provide the US’ only salvation
from debts and skewed liquidity distribution
As LKS and other property magnates have observed
We have a policy-led property “market”
Would HK policymakers want property prices down 20% next year?


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