The View

Rates will do nothing to burst Hong Kong’s property bubble

PUBLISHED : Thursday, 30 March, 2017, 7:20pm
UPDATED : Thursday, 30 March, 2017, 7:20pm

Like a perilous high wire act, the Hong Kong property market defies expectations as prices keep rising. But, instead of a rational or irrational correction, this cycle may be the one where the property market spins out of control like a tumbling top and ruins the entire economy. This time it may defy the interest rate cycle and continue rising.

One group of tiresome analysts keeps repeating that Hong Kong asset prices are vulnerable to a deep correction when the Fed begins to shrink its balance sheet once again.

They believe that point is now coming as Federal Reserve chair Janet Yellen has said it will start to unwind its asset holdings when interest rate rises are “well under way”. This correlation has been repeated over the years and used as an excuse by Hong Kong policy makers to do nothing about high flat prices. However, all rules eventually fail.

After near zero rates for eight years there’s no reason that a 2 per cent Fed rate will burst the Hong Kong housing bubble. Interest rates are not problem.

The Hong Kong property market is artificially structured. It lacks most of the regulatory and competitive elements in other property markets overseas have, like rental control, tenancy protection, relatively open access to land and market competition with numerous developers.

The government has utterly failed to regulate the public and private residential markets, from land supply to sales methods such that social stability is in jeopardy.

At least Li Ka-shing is being honest when he said recently at Cheung Kong’s annual meeting that, “I don’t see home prices falling. I see home buyers with strong financial stability.”

Unfortunately, nothing is stable. According to the realtor Knight Frank, “to be eligible for a residential mortgage (with a 50 per cent loan-to-valuation ratio) to buy a HK$15 million flat, for example, the buyer must have an income of at least HK$86,000 per month, which represents only 8 per cent of the working population in Hong Kong.”

The supply-demand conflict is the treatment of flats as a financial asset versus public good. About who will take back or maintain control of the economy. Without a true political class all you ever have is inter-elite management and money grubbing. Despite resisting politics, politics will decide the outcome of the struggle to build an equitable social framework around Hong Kong’s fixation on capitalism.

Analysts focus on the repetition in yesterday’s interest rate cycle. They forget for the first time that the Hong Kong economy now faces permanent secular stagnation or a chronic lack of demand due to high property prices. And any weakness will test the veracity of the urban myth that mainlanders own 200,000 empty flats paid by cash.

John Maynard Keynes said income was just as important as profit, as income looks after the demand side of the equation while profit looks after the supply side. I think we will find he was right. Hong Kong’s dilemma will prove that recent ideas on just maximising profit stop working when consumers max out on debt. Or simply can’t afford to buy flats at the current price.

History can be a cruel mistress. The Communist Party in Beijing is presiding over the end game in Hong Kong of the “ultra” capitalism that Marx predicted. The wealthy property elites will tend to destroy the system by taking so much of it that demand collapses, thus turning everyone else into serfs. That is what we are witnessing in Hong Kong.

It doesn’t take much stability to maintain Hong Kong as a financial centre - low crime and clean streets are all it takes to make foreign bankers feel safe. But, even senior bankers have started asking me about the future of social stability.

I don’t see the government-property, cartel establishment doing anything significant to resolve this issue besides tossing out a few social welfare crumbs.

How silly is it to see tycoons on the news saying that wealth disparity is a major problem in Hong Kong while they are the sole cause of it and obstacle to any solution. It’s Hong Kong’s distinct version of “fake news” allowing all parties to renounce responsibility for the greatest crisis facing the city.

There appears to be more upside to go in the property market until the working and middle classes initiate civil protest and insurrection. That’s the new metric.

Hong Kong people are very tolerant of exploitation because historically they desperately cling to the dream that one day they will climb to the top of the teeming anthill.

However, even they have already realised that they are dreaming the impossible dream.

Peter Guy is a financial writer and former international banker