Jake's View

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

PUBLISHED : Thursday, 24 October, 2013, 2:07am
UPDATED : Thursday, 24 October, 2013, 1:35pm

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.