A reader has written in to take issue with a column from a couple of weeks ago which argued that despite the steep run-up in Hong Kong's housing prices over the last few years, there are still no signs of a classic credit-fuelled property bubble.
Given the prevailing conditions - a limited supply of new homes and mortgage rates below the rate of inflation - I argued that buyers are acting rationally in pushing prices higher.
As evidence, I noted that the rental yield on a typical flat is currently two percentage points above the yield on the 10-year exchange fund note, which is high by historical standards. In contrast, at the height of the 1997 property bubble, rental yields were more than six percentage points below the exchange fund note yield: a clear danger signal.
'I fear you are starting to think like an economist,' the reader chided me.
Economists, he explained, ignored reality, preferring to create theories based on selective data. That's why they were always wrong.
'If it looks like a bubble and feels like a bubble, I think you'll probably find it is a bubble,' he wrote.
With interest rates now artificially low, he suggested homeowners would be dangerously exposed to a rise in mortgage rates. 'What is the ratio of debt to equity in the average middle-class mortgage?' he asked. 'What is middle-class mortgage borrowing as a proportion of income, and how sensitive is that to increased interest rates?'
I can try to answer both questions. The first chart shows the average value of new mortgages relative to the value of the homes being purchased. Over the last 10 years this loan-to-value ratio has fallen from nearly 70 per cent to below 55 per cent.
In other words, homebuyers today are leveraged by only 1.2 times, compared to 2.2 times 10 years ago.
That means the typical owner of a mortgaged home in Hong Kong is sitting on a comfortable equity cushion. As a result, prices would have to fall by almost half from current levels before we began to see high levels of negative equity forcing fire sales of mortgaged properties.
The second chart shows the private household affordability ratio compiled by the Centaline Property Agency. This tells how much of its income the average Hong Kong household has to spend each month to service the mortgage payments on a typical flat.
At the moment a mortgage eats up around 43 per cent of household income. That proportion has doubled since the depths of the property slump in 2003, but it remains far below levels seen during the 1997 bubble, when the cost of servicing a typical mortgage was actually greater than median monthly household income.
Of course, the cost of servicing a mortgage would go up if interest rates rose. If the US Federal Reserve were to raise its target rate by a full percentage point from 0.25 per cent currently to 1.25 per cent, thanks to our currency peg the cost of servicing a typical Hong Kong mortgage would shoot up to around 56 per cent of median monthly income. That would cause hardship for many families, and would doubtlessly force some to downgrade to more modest accommodation.
But it would be unlikely to trigger widespread mortgage defaults. Even when mortgage service costs were last that high following the 1997 property boom, the proportion of mortgaged households more than six months behind with their payments never exceeded 1 per cent.
However, with US inflation down to just 1.7 per cent, economic growth lacklustre and the unemployment rate still painfully high at more than 8 per cent, the chances of the US Fed raising interest rates by a full percentage point at any time in the foreseeable future are negligible.
Indeed, last week the Fed reiterated its promise to keep interest rates 'exceptionally low' until at least the end of 2014. As a result, mortgage costs in Hong Kong should remain relatively affordable.
That doesn't mean property prices can't fall. They can. Over the second half of last year, prices fell by 6.5 per cent despite favourable conditions.
But it does mean that Hong Kong is highly unlikely to see the sort of downward spiral in prices you get when a property bubble finally bursts.