IN THE EARLY 1990s, Britons thought property prices would not reach the peaks seen in the boom-bust cycle for at least another generation. In Japan, it took almost a generation for the realisation to set in that a once and for all, market peak had probably been witnessed. Hong Kong, for very different reasons, is frequently compared with both markets. Japan's late 1980s housing bubble stemmed from reckless monetary expansion, systemic misallocation of credit and hopelessly misplaced expectations of its economy's future earning potential. Britain's boom-bust paled by comparison but the country's seemingly pre-programmed political economy in favour of property inflation finds a similar expression in its former colony. Since the Sars-induced nadir, Hong Kong has experienced a remarkable bounce. Mass market prices have climbed almost 50 per cent while certain luxury properties have almost hit 1997 highs. Negative equity may be understated at 28,000 households by the Hong Kong Monetary Authority's narrow measure but five years of massive debt repayment has left personal balance sheets much improved. Hong Kong's 1990s boom may have been underwritten by a Sino-British bargain to fix land supply and an inappropriate currency regime but it has proven an impeccably managed boom-bust cycle. Even at their worst, mortgage default rates never hit levels seen in most developed countries in good times. Prudent banking oversight must take much of the credit but also the simple fact that, throughout the downturn, Hong Kong continued to earn very good money for itself through trade, provision of services and off-shore income accruing largely from mainland-based manufacturing operations. Five years of deflation turned Hong Kong investors into some of the most significant marginal buyers in property markets from Sydney to London's West End. Yet with the world's Anglo-Saxon centres looking increasingly frothy, that money has been deployed back home, in part explaining last year's investment-driven bounce. As ever in the early stages of a market recovery, scepticism abounds. Unemployment remains relatively high and real wages are only inching up. Hong Kong looks under-skilled and - despite its dramatic re-pricing - remains relatively expensive when compared with its hinterland. A weak US dollar and cyclical reversal of price falls may have spurred a temporary bounce but bears lament that secular forces of decline mean a Japan scenario cannot be discounted. If a moment of inflection were to be identified, now might just be that point. Anyone seeking a reason not to buy has no shortage of excuses in the shape of already rising interest rates and a significant (although temporary) inventory of unsold flats on the books of equity-return-challenged developers. Price depression possibilities would also seem to lie in the soon to be introduced tenancy law reform, which liberalises landlords' ability to take possession of their property. Longer term, this liberalisation will be positive. London saw its private rental stock increase from 5 per cent in the 1980s to about 18 per cent after Britain similarly relaxed security of tenure provisions. The resulting flexibility attracted capital and increased owners' mobility with attendant economic benefits. But the short-term effect is likely to be a flood of private rental properties hitting the market. And yet that is not the signal being sent by stock investors who continue to bid developer stocks higher despite a backdrop of falling world asset prices, soaring oil prices and uncertainty about China's economic fine-tuning efforts. Their bet is a simple one that reduces to a single word: inflation. Interest rates may be rising but anyone who buys Hong Kong property today is betting that general prices will rise, much as they did in the mid-1990s during the last up-cycle in United States rates. Underlying that must be a belief that Hong Kong has an economic future steaming take-out dim sum at theme parks for mainland tourists. The case for 'boomtown' Hong Kong was eloquently made by CLSA economist Jim Walker, who in a recent report wrote of Hong Kong emerging as China's finance and services capital city. Cities sitting at inflection points rarely brim with certainty and self-confidence. Yet, today's Hong Kong looks far more like London than the Tokyo of a decade ago. For this non-Hong Kong property owner, the dilemma is less about price than committing to a city that for 12 years has often felt like a transit stop. That is not a dilemma facing the vast bulk of the increasingly settled Hong Kong citizenry but in a liberalised home-rental market nor is it a deterrent that should matter that much.
