If history is any guide, the long queues of property buyers seen at the Tsuen Wan residential project last weekend could be the harbinger of a bubble in the world’s most expensive housing market. SCMP, June 3 And what if it is not? I agree that it is a bubble we are looking at. It is the third one I have seen form in Hong Kong and it looks to me just like the ones I watched blow up and burst in 1981 and 1997, with the same long queues of speculators and the same bubble talk in all the media, including the unheeded warnings that it cannot last. But what if this bubble is more like a football, and more durable than a shimmering, small globe of soap? I ask the question because, as the chart shows, one thing is different from both 1981 and 1997. It is that the underlying cost of money, as best represented by the US 10-year treasury yield, has come steadily down since 1981 and still defies expectations that it will soon rise again. As an investment analyst for a local brokerage house in 1981, I remember working with our team to calculate an affordability measure for the fevered property market. If we could prove that people could still afford to buy at the levels then prevailing, we might argue that the market still had some way to run. The calculation is done, now as then, by a formula that takes account of average flat price, average household income, assumed down payment, and mortgage term and interest rate. But every time we worked it out, we dropped it as a ticking bomb. With an average best lending rate of more than 15 per cent, plus a mortgage premium, servicing a mortgage could cost as much as 200 per cent of average household income. It was not quite so bad in 1997 but still in the realms of impossibility at more than 100 per cent of average household income at the height of the market. And now, with prices at a record high of almost double the 1997 peak, the Centaline property agency calculates it at only 57 per cent of household income. Mortgage interest rate is the biggest single factor in an affordability ratio and it has now fallen to levels never believed possible in 1981 or 1997. How it happened is a simple story. Our interest rates are tied to US rates through our peg to the US dollar and it so happened that in 1987 control of the US Federal Reserve board fell into the hands of a private statistics consultant with political ambitions, Alan Greenspan. He engineered a policy of reducing interest rates every time there was a scare in financial markets, thus ensuring both that these markets quickly rose again and that he retained his job through several presidential administrations. His successors went even further, buying up vast amounts of government debt to force interest rates down artificially. These negligent practices have since spread to Europe and Japan. The result has been severe inflation in financial markets, growing wealth disparity around the world and economic growth suppressed through skewed allocation of capital. And now the people responsible for this folly have to admit that they do not know how to undo it and that their political masters do not really want them to do so. Which makes me think it possible that perhaps the future holds continued high prices for financial assets, including property, for many years to come. And thus perhaps those people in the queues have it right. Perhaps this bubble is a football, not a soap bubble and it won’t burst for a long time yet.