Jake's View

Here’s the one thing bears are getting wrong when it comes to Hong Kong property

The US won’t unleash a big change in interest rates

PUBLISHED : Wednesday, 01 June, 2016, 5:34pm
UPDATED : Wednesday, 01 June, 2016, 7:10pm

Housing market recovery just a blip, analysts warn

SCMP headline, June 1

I’m going to be a bore on this one. It is not a recovery and neither is it a blip. Our property prices are driven above all by US interest rate trends, not by our immediate economic fortunes, and there is no big change coming in US interest rates.

But first let’s get some pictures on the picture. The first chart shows you the government’s overall property price index set to a base of 100 for October, 1997. That was the peak of the last great housing bubble.

We then see the market fall almost 70 per cent by July, 2003, at the worst of the SARS epidemic. From there on it is a recovery with prices peaking at 177 on this index in September last year. More recently the index has fallen to 157 and last month there was a blip upwards.

Look harder. It’s there. I swear it is. Get a microscope then.

Now to the second chart on the Centaline Property Agency’s affordability ratio for small and medium units in private sector housing.

That’s a mouthful and it says that affordability was at its very worst in June 1997 with the average private household forced to pay 113 per cent of average household income for a mortgage on a new flat.

Obviously, this was not sustainable and by July 2003 the ratio was down to a very affordable 19 per cent. Since then, however, it has only gone up to 49 per cent, which is still less than half of what the record says can happen in property market craziness.

It’s a definite anomaly. Prices are up by 57 per cent from their mid-1997 peak but the measure of how much of a burden this is on household finances has fallen by 57 per cent.

The difference is all down to interest rates with Hong Kong having to follow the US Federal Reserve Board’s misconceived zero interest rate policy because of our formal link to the US dollar. The crucial determinant of our housing costs is the cost of servicing a mortgage and the mortgage interest rate is by far the biggest factor in this.

Contrary to common belief, it is not a shortage of housing that drives prices. We don’t really have one. Cage homes are dreadful but, fortunately, few in number. We once had far more people in squatter housing but the squatter villages are now gone. Holders of permanent resident cards have homes.

Demand for housing is rather driven by ambition to live in less crowded homes. The number of people per household has been steadily down for as far back as I have data. But while it may be a reasonable ambition it is not a crying need.

Thus back to interest rates. I say US interest rates in the foreseeable future will rise no more than 25 basis points. The Fed runs scared of Wall Street protest.

What I see in my crystal ball for property prices is what I call gonowhereness, like the grand old Duke of York’s ten thousand men, neither up nor down, not much anyway.