Quantitative easing (QE) refers to large-scale asset purchases by the US Federal Reserve to inject liquidity in the world’s biggest economy after the onset of the global financial crisis in late 2008. In September 2012, stubbornly high US unemployment and faltering economic growth prompted it to launch QE3, under which it planned to buy US$40 billion worth of bonds per month, with no set end date. As of late 2012, it had bought some US$2.3 trillion in long-term securities. In December 2012 it announced it was increasing its purchases to US$85 billion a month.
Hong Kong takes dollar down a peg
As is well known, United States Fed Reserve chairman Ben Bernanke announced a third round of quantitative easing (QE3) in September, and then the Hong Kong dollar did exactly what it has done the two previous rounds of QE: trade at the bottom of its band against the US dollar at HK$7.75.
So far it's unclear whether this is due to money coming from offshore, or because funds holding foreign currency in Hong Kong have decided to buy investments such as stocks and property.
In any case, lots of people are buying Hong Kong dollars in preparation to buy Hong Kong assets, creating appreciation pressure on the local currency.
Two weeks ago the Monetary Authority traded HK$14.4 billion for foreign currencies, effectively weakening the local dollar. It was the authority's first such intervention in two and a half years.
This was remarkable in itself but it also flagged up the possibility that Hong Kong was riding a liquidity bubble. After all, previous rounds of QE drove prices up for local stocks and property, in 2009 and 2010.
According to market-data provider EPFR, aggregate net inflows from overseas-domiciled funds into Hong Kong rose more than US$400 million since early September. This reflects investors' appetite for investments in the local currency.
The Hang Seng Index reached its highest level in more than 18 months in the third week of October, driven partly by strongly performing H shares (Hong Kong-listed stocks from mainland incorporated firms) and Hong Kong property stocks.
Daily turnover at the Hong Kong exchange reached an average of HK$52 billion since September, up almost 20 per cent from June to August (some seasonality is at play; trading volumes typically pick up in the fourth quarter).
Turning our focus to property, it is more difficult to isolate the impact of QE3 on local prices.
Monetary Authority chief executive Norman Chan Tak-lam has warned of a property bubble, linking the risk to money unleashed by QE3. The Hong Kong government has announced a series of strong measures to cool property prices.
Nevertheless, transaction data through September from Midland Realty, a property agency, and the Land Registry show only a small rise in property sales since mid-July.
And this does not appear to be directly related to QE3, given the time lag between sale-and-purchase agreements and transactions.
Weekly transactions at 35 large housing estates in Hong Kong show that volumes have been relatively stable from July to now, although there was an upswing in July and August following the announcement on July 16 of the Home Ownership Scheme, which starts in 2013.
The upshot is that QE3 has had no conclusive impact on Hong Kong's property market.
UBS remains positive on the residential property market, forecasting a 5 per cent to 10 per cent increase in prices in 2013.
There is still potential upside for prices given that home ownership in Hong Kong is a moderate 52 per cent, according to the Census and Statistics Department.
And 60 per cent of owner-occupiers had paid off their mortgages in 2011 against 48 per cent in 2001. Affordability, measured by the ratio of home prices to household incomes, is starting to reach the same levels as in 1997, but a prolonged period of low interest rates in Hong Kong suggests that the 1997 level will likely be broken.
Carl Berrisford is an analyst for UBS CIO Wealth Management Research