Jake's View

Hong Kong home prices are not coming down anytime soon, and it’s because of her

PUBLISHED : Monday, 23 November, 2015, 7:28pm
UPDATED : Tuesday, 12 January, 2016, 3:30pm

US stocks posted sizeable gains overnight after minutes of the Fed’s October meeting showed most policymakers were willing to increase interest rates next month.

Business, November 20

I’ve got to hand it to the gold bugs. They have always said that the discipline of the gold standard is the only way to keep central bankers honest. The gatekeepers at the money gate will turn irresponsible if they can open that gate at will rather than when the rules say they may.

Within mere decades of abandonment of the gold standard, it has proved absolutely true.

Mind you, I don’t agree with the gold bugs that the solution is to return to the gold standard. Once gone it is gone forever. For any number of reasons it would no longer be workable.

But I shall allow the gold bugs the justice of their laughter as they observe members of the US Federal Reserve Board fretting about their timing of the most talked about 25 basis point interest rate hike of history.

READ MORE: US dollar peg to blame for high private rentals in Hong Kong

For perspective, look at the chart of a 35-year history of the federal funds rate, the rate at which the Fed makes money available to commercial banks.

At the left of the chart in 1982 we have Fed chairman Paul Volcker acting as a proper monetary host by kicking the guests out of a party that has gone on too long. At the right of the chart I show the 25-basis point uptick that Her Muddleheadedness, Janet Yellen, Volcker’s present unworthy successor, cannot yet bring herself to impose.

And 25 basis points is nothing after seven years of a zero-interest-rate monetary policy that has performed miracles for Wall Street speculators but has left the rest of the US economy still staggering. Normal conditions would require interest rates to rise by perhaps 20 times as much.

But it will not be more than 25 basis points. The financial speculators to whom the Fed has sold itself will object. And this 25 basis points will very likely soon be clawed back again. America’s addiction to debt is now worse than its addiction to drugs. How the gold bugs must laugh.

I introduce all of this to lead up to my second chart of the Hong Kong government’s price index for flats of less than 400 square feet, the shoeboxes in which most people live in this town and which do not seriously attract the attention of mainland or other speculators.

This is the heart of our property market and they say that it is losing steam, that prices will soon come down because the market cannot be sustained at such high levels. That’s what they say and have long been saying.

Hah! That’s what I say.

Prices have been driven this high because of a prolonged period of extraordinarily low mortgage rates, thanks to the HK dollar’s peg to the US dollar.

And when it becomes apparent that Fed is dead scared of anything but a slight tweak, that interest rates will stay extraordinarily low, then watch as this property market gathers itself for another leap upwards.

We have not yet reached the peak of this insanity.