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  • Dec 22, 2014
  • Updated: 5:00am

Hong Kong peg to US dollar blamed for city's soaring property prices

PUBLISHED : Monday, 14 October, 2013, 12:00am
UPDATED : Monday, 14 October, 2013, 1:56pm

The pegging of the Hong Kong dollar to the US dollar has been blamed for creating artificially low interest rates that contribute to the city's sky-high property prices.

However, some analysts warn that Hong Kong's real estate market would face immense challenges if the peg is removed.

Average home prices have soared more than tenfold from HK$700 per square foot in 1983 - when the Hong Kong dollar was pegged to the US dollar - to HK$7,244 last month, based on gross floor area, according to data compiled by Midland Realty.

"When our currency was pegged to the greenback, it marked the day when we sacrificed our role and ability to set interest rates," said Midland Realty chief analyst Buggle Lau Ka-fai.

Hong Kong's property market has experienced wild swings over the past three decades. It began a sustained upward trend from 1983, hitting a peak in October 1997. But home prices then plunged 70 per cent and entered a prolonged downward trend after the Asian financial crisis. Prices bottomed out in August 2003 and have since climbed again. Prices have now surpassed the 1997 peak by 17.6 per cent, prompting the government to launch a string of measures to rein in the red-hot market.

"Property prices have shot up whenever we see devaluation of the US dollar as our assets become more affordable to overseas investors," Lau said. "As Hong Kong is an import economy, it will boost our inflation and encourage investors to buy properties as a way of hedging against rising inflation."

A case in point was the 26 per cent appreciation of the yuan against the US dollar over the past 10 years, which sparked a buying spree by mainlanders looking for new homes in the city and sent prices to new heights until the Hong Kong government imposed a 15 per cent buyer's stamp duty in October last year.

Andrew Lawrence, the managing director of real estate equities research at Malaysian investment bank CIMB Securities, said the impact of cheap housing credit could be seen by comparing property transaction volumes with mortgage approvals.

Before 2009, about 75 per cent of property transactions required a mortgage, yet following the drop in mortgage rates nearly every property transaction had been mortgage-funded, Lawrence said.

"Homeowners have become ever more reliant on debt to fund their property purchases," he said.

Mortgage interest rates have dropped to 2.3 per cent from a high of 10 per cent in 1990 and 2000.

Asked how Hong Kong property prices would be hit if the city abandoned the peg, Lawrence said the question was what currency it would be repegged to.

"It will most likely repeg to the yuan, which would mean we would have to adapt to the mainland's high interest rate," he said. "It would effectively impose a significant change in terms of interest rates."

But Lawrence said that was unlikely to happen until the yuan became fully convertible, and by then the Hong Kong dollar would be replaced by the yuan. "There will no Hong Kong dollar and we will be trading in yuan," he said.


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This article is now closed to comments

History showed that the HKD currency of a such small economy like in Hong Kong is likely and very easy to attack by speculators. It was 30 years ago the case and will be in future always a threat.
Even with the USD peg, the "market mechanism" is still functioning. The USD is cheap at the moment so is the HKD. Therefore people in HK do not want to put their savings and assets into something which does not vanish. And that is like almost everywhere real estate. Plus the low interest rate it is a very wise thing to keep real estate for the moment and not selling it. Doe the HK government notice that transactions in the real estate sector are very low, but prices are still very high? Think about what options you have with your savings in HK other than real estate?
I wouldn't be surprised that one day HKSAR does use yuan eventually, but most likely by then Mr. Lawrence and I will probably be buried six feet under.
You can't blame market mechanisms for when things go bad and start hating it, because in the past, Hong Kong has also enjoyed the strength of the USD through the peg.
Would you trust the words of a property expert who selected the given name 'Buggle '
The HKD-USD peg has gone through several financial crises since its inception and there is no reason why it cannot or will not continue in the present world economic recovery stage unless experts believe it is time to do away with the peg altogether and allow HKD to freely float in the financial market thereby dragging it back to the pre-peg state!
Why do you want to peg it to annother currency? The Hong Kong Dollar could make its own appearance on the market. Then it would also represent the true value of the Hong Kong economy and society.


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