Jake's View

US dollar peg to blame for high private rentals in Hong Kong

Hong Kong is forced to follow as a negligent and scared Fed keeps interest rates at record low levels in a vain attempt to lift the economy

PUBLISHED : Tuesday, 06 May, 2014, 12:32am
UPDATED : Thursday, 22 May, 2014, 6:44pm

[French economist Thomas] Piketty states that unrestrained capitalism and free markets have caused great inequality ... In Hong Kong this can clearly be seen in rising property prices and rents - where property developers and landlords get rich at the expense of workers' stagnant wages.

Letters to the editor, May 4

I suppose I shall have to inflict that big Thomas Piketty book on myself now. What trials of tedium we must endure when defenders of righteousness pick up their pens. In the meantime, however, let's deal with this Hong Kong angle.

The first chart should set things straight. The blue line on top represents the nominal wage index, flat while the economy went through a severe bout of disinflation from 1998 to 2005 and rising since that time.

The lower red line represents average private housing rents, way down with the disinflation and only back last year where they were in 1998. It was not the wages that were stagnant here.

But, of course most workers do not live in private rental housing. Their landlord is the government's Housing Authority and its rents are on average now about 15 per cent less than they were in 1998.

The figure is, in fact, more like 30 per cent less when you take account of the rent concessions regularly given to public housing tenants.

There, that's that one dusted.

Now the angle on prices. The second chart shows you two closely interwoven lines. One represents the constant maturity yield on US 10-year treasury bills, the other the average gross yield (yearly rent as a percentage of market price) of private rental flats in Hong Kong.

Don't bother yourself with which one is which. They are the same.

Because of the Hong Kong dollar peg to the US dollar our interest rates and yields on all financial assets can vary little from their US equivalents except in times of crisis.

In the US an irresponsible monetary authority, the Federal Reserve Board, has for a prolonged period kept interest rates at record low levels in a vain attempt to stimulate a weary US economy and in a (so far) successful attempt to let government escape paying the price of an addiction to debt. We are forced to follow. What this means is that where an annual rent of HK$100,000 would have put the price of a flat at about HK$1 million in 1984, it now makes that flat worth at least HK$4 million.

We assume no difference in the flat here and no difference in the rent. It is just monetary magic that quadruples the price.

And it is not property developers or landlords who have driven home prices out of the reach of so many people this way. It has happened because we are pegged to the US dollar and because the US Fed is scared to say boo to Washington and Wall Street.

The fact that the rich are the beneficiaries of wealth polarity does not necessarily make them the cause of it, nor does it necessarily make expropriation of their wealth the remedy.

This is a government-induced malady.