Jake's View

Rise in interest rates is something to welcome, not worry about

The easier it is to pay off a mortgage, the more likely it is that prices will go up and nowhere is this equation truer than in the property market

PUBLISHED : Tuesday, 01 July, 2014, 4:05am
UPDATED : Tuesday, 01 July, 2014, 6:43am

Homeowners do not have to worry about a sudden surge in interest rates, which would further hit an already ailing property market after the United States Federal Reserve's move to further reduce its bond-buying programme …, Chan Ka-keung, the secretary for financial services and the treasury said …

SCMP Business, June 20


Secondary prices rebounded over the past three weeks, according to the Centa-City leading index … Agents reported an increasing number of record-breaking deals in the secondary market in various districts …

SCMP Business, June 30


I am sure Professor Chan is right. All this talk of tapering by the Fed is just that, talk. The United States is so addicted now to ultra-low interest rates that going into rehab by raising rates would produce a storm of protest to blow every Fed governor off his seat and right out the door.

Quantitative easing is thus here to stay until the next financial crisis it produces and perhaps longer. I don't like having to concede this one to the gold bugs but they have a point. The temptations of fiat money are so great that sooner or later every central bank will fall for them.

It reminds me of an old saw from the investment guru Peter Lynch, who said he liked the kind company any fool can run on the grounds that sooner or later some fool will.

I like the kind of monetary system any fool can run on the grounds that sooner or later some fool will.

And that would be the Hong Kong monetary system, pegged to the greenback and operated as a mechanism. Any fool can run it if he sticks with it and develops no clever thoughts of his own.

But it does mean that when fools run the US monetary system, we are inevitably enmeshed in their foolery?

We had not thought of that when we put the peg in place 30 years ago. We accepted the wisdom of the Fed and thought we ran in danger from fools only at home.

Professor Chan's problem is that he is looking at the wrong danger.

It is not that home prices will fall and grumbling homeowners will join the Occupy Central movement.

It is rather that home prices will continue to rise and deprive even more people of the prospect of homeownership.

What the good professor is looking at here is the most powerful membership drive anyone could ever muster for Occupy Central.

Now let me set it straight once more for Professor Chan's boss, Chief Executive Leung Chun-ying, who reportedly spends his days at present poring over aerial photographs to look for land on which he can build housing.

The reason prices are so high and once again climbing is not a dire shortage of housing. There may be a shortage but it is not dire.

Even the government's recent housing aspirations survey, conducted to justify starting a big public housing initiative, showed that demand for separate accommodation was more based on convenience than necessity.

Prices are up because a prolonged period of artificially low interest rates has distorted the market.

The single biggest factor influencing ability to buy a home is the monthly mortgage payment, and the single biggest factor influencing mortgage payment is its interest cost component.

Drive interest rates down and you drive prices up until monthly mortgage payments are again in balance with the limits of general affordability. It works that way in other financial assets as well but in nothing does the equation hold as true as it does in the property market.

The only you thing you can do about this, Professor Chan, is put your hands palm down on the seat cushion of your chair and then sit on them. It's galling but the alternative is to go off the peg and this would instantly produce a much greater shock to the system. It might not fix things anyway.

Administrative measures such as punitive stamp duties just make things worse, aside from punishing the wrong people. The only cure is rising interest rates and, unfortunately, we cannot have them yet.

But they are something to welcome, not to worry about.

And what they really have to recommend them is that people would earn money on bank deposits again.