Hong Kong housing market no longer scared by interest rate talk

PUBLISHED : Monday, 03 July, 2017, 6:22pm
UPDATED : Monday, 03 July, 2017, 11:00pm

Correction seen for housing market in HK

Business headline, June 30

It’s in the price if it’s in the press

Investment aphorism

I don’t want to do my own trade down here but it is generally true that by the time you read something of investment interest in a newspaper the market price of that investment has already taken it into account.

This assumes, of course that the investment news you are looking at is genuinely of interest. Sometimes it is not. When, for instance, Norman Chan Tak-lam, the present head of the Hong Kong Monetary Authority, pronounces that the market looks dangerous, the market generally ignores him.

Norman, a career bureaucrat, once sat behind a desk at Standard Chartered for several months. It is the closest he has ever been to investment experience and the market knows it.

This is more, however, than can be claimed by Janet Yellen, an academic who never had any real working experience at all before being let loose to toy with the switches and levers of the US Federal Reserve Board.

She is of the view that the enormous distortions she and her immediate predecessors have created in the US economy by driving interest rates to the zero level eight years ago can be painlessly unwound as she now guides interest rates to rise back to more normal market determined levels.

Will Hong Kong home prices fall 30pc in next 12 months?

If she can indeed do all this then Hong Kong homeowners had indeed better beware. Our peg to the US dollar locks us into US interest rates and it is low interest rates that have driven Hong Kong residential prices to record levels.

If the future holds the clear prospect that US interest rates are to continue steadily up to a Federal funds rate of, let’s say, 5 per cent with other rates rising in tandem, then there would be no need to see a correction in the Hong Kong housing market. It would already be upon us and it would be a bad one.

And if industry professionals indeed genuinely expect a 30 per cent drop in prices soon, as we reported some saying they do, then the greatest value this newspaper has to them is its job ads. They would be running for the industry exits and a career change right now.

But they are not and the latest release of data shows residential prices still rising steadily, which they would never do if the general view on the market was that interest rates are headed straight up to much higher levels.

Hong Kong home prices scale new peak, 20 years after 1997 record

In my view, what our property market is saying to us is that Janet Yellen will not be able to raise interest rates much higher, if at all, before she encounters a severe recession from all the debt distortions of the multi-year bout of artificially low interest rates for which she is largely responsible.

It is saying that people in Hong Kong were worried in mid-2015 at what was supposed to be the start of these interest rate rises and that prices then fell in anticipation, as the chart shows. But all that happened were a few much delayed and timid increases of 25 basis points.

Within six months home prices bottomed and began to rise strongly again. The market is no longer scared of the interest rate talk. It foresees only a moderate rise of interest rates now, not enough to unsettle the residential market.

But even if my reasoning here is faulty it still is true that any market is like super-efficient sponge soaking up all the possible news of interest and discounting it in prices. This one has just bounced back from a correction. I think the bad news is already in the price.

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