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

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.