In a world of zero interest rates, some things are bound to go wrong. In Hong Kong's case, very wrong.
On the surface, everything is great. The economy is growing 6.5 per cent, confounding the sceptics. It is good to be the gateway to China's boom while the most developed economies fret about a double-dip recession.
Yet that proximity comes with a price, and a growing one. Few doubt that Hong Kong has a property bubble on its hands. Home prices have surged about 47 per cent since the start of 2009. Who is buying? Wealthy mainland Chinese.
The other force inflating Hong Kong's bubble is near-zero US interest rates, given a currency peg to the US dollar. Taken together, they are putting Hong Kong on the front line of economies grappling to navigate this world of zero.
A year ago, many thought an apartment selling for $HK24.5 million ($3.3 million) was the peak. A one-bedroom, 76-square-metre flat in the Kowloon district going for such a sum had insanity written all over it. Think again; Hong Kong property is still on the rise.
This month the chief executive of the Hong Kong Monetary Authority, Norman Chan, said risks in the property market may exceed those in 1997, the height of a previous bubble that was followed by a six-year slump that more than halved values.
The market, Mr Chan said last week, has been rising ''quite rapidly'' and may collapse if prices keep going up. Mr Chan joined the Financial Secretary, John Tsang, in cautioning about asset imbalances that have had the government raising down-payment ratios and pledging to increase land supply to rein things in.
Far more aggressive action may be needed. Any perception that home prices can rise indefinitely is always dangerous: look at the US before the subprime meltdown. What concerns many Hong Kong investors is that official action thus far has been rhetorical and cosmetic, not substantive.
It is a touchy issue in Hong Kong, an economy that many see as a huge property market sprinkled with high-paying industries - like investment banking - that ultimately support real estate. Just as low government bond yields hold Japan's economy together, exuberant property is the succour that keeps Hong Kong's blood flowing.
Mr Tsang and Mr Chan would have some serious explaining to do if steps they took derailed the market. The politically connected tycoons who tower over Hong Kong, like Li Ka-shing, would not be happy. And yet that may be precisely what is needed to stabilise things.
A first step could be to scrap the peg to the US dollar. It is not clear that is even on the radar screen. The idea is that the policy has served Hong Kong well since 1983, so why mess with success? In a more perfect world, a peg to the Chinese yuan would make more sense.
Thanks to the dollar peg, mortgage rates in Hong Kong have been at about a 20-year low. If you are a mainland investor with a few million dollars lying around, Hong Kong property has been an obvious bet. And even if Hong Kong is hot, it is less of a bubble than, say, Shanghai. For now, at least.
Unsustainably low interest rates seemed necessary at the depths of 2008, when all hell was breaking loose in credit markets. The risk now is that the world is getting used to them, just as businesses and politicians in Japan did.
Free money drives investors into riskier assets and inflates asset prices. It means any global recovery may lead to another bubble. Growth underpinned by bubbles rarely lasts very long.
In a sense, zero rates bail out the wrong end of the market. Economies such as those of the US and Japan need consumers to spend more to boost growth and stabilise prices.
Ultra-low rates penalise households as interest on savings evaporates. And so, rates at current levels are cannibalising recoveries.
The bigger risk is that the bursting of the latest bubble will trigger a chain reaction. The events of the past 15 years should be a reminder to Asian officials not to be complacent.
Hong Kong property prices peaked in 1997 as the city slid into its first recession in more than a decade at the start of the Asian financial crisis. Understandably, officials do not want to cause another plunge.
Waiting may make things worse. Hong Kong home prices rose to their highest since December 1997 in the week ended September 5, the Centaline Property Agency says. Since the government's actions to calm the market on August 13, prices have exceeded estimates in big land auctions. And the Hang Seng Property Index has gained almost 7 per cent since then.
If policy makers are not careful, $HK24.5 million million flats will become too common for comfort. And it will be too late to avoid another crash.
Bloomberg
Link here:
http://www.smh.com.au/business/l ... 20100921-15ld5.html

When property values go sky high, it's going to affect everyone, the rent will go up, in term the
businesses will raise prices on all goods and services, in order for them to survive, it will passed that on to the consumers in the form of high prices on everything. The worst hit will be the average joe and his family, and they will have a hard time putting food on the table. The poor will get poorer while the rich will get richer. What a stinking world!!!

Don't think a collapse is imminent. That's a strong word meaning a fall of 50% or more. It would be more of a consolidation and then a correction of about 20% which in many cases would have already wiped out the downpayment on the property if you took out an 80% loan from the bank. The same thing is happening in Singapore. Mostly Chinese buyers pushing up prices along with wealthy Indonesians (a close second) and Malaysians.

shit i just bought property in HK. NT side though kinda closer to china.

not for me for parents retirement home, which might be ok since I'm not looking to flip it

China itself is on a bubble, it's only time when the market cycle takes its effect on the Chinese economy, which will affect its surrounding partners, much like the American economy and its severe impact on its trading partners.

I wouldn't buy property in HK right now as there does appear to be a bubble in the realestate market. I don't think the HK government will do anything too silly that will result in a collapse in property prices. The best cenario would be some good policies to help the prices gradually decrease to more reasonable levels.

yes i agree should not buy property in HK now. 1) right now the prices are just way toooo high, 2) there will be more apartments supply in the market 3-4 years later, 3) worry about china's property market given the govt wants the property prices to come down.

the downside is just way too much from further upside at this level.

I hope property prices come down soon, it seems like I have been waiting years, but the prices just keep climbing.
At this rate I will have to buy one of them old 3 floor "tong" apartments, but didnt 1 of these fall down recently.

everything sounds like doomsday.  regardless, it seems that so many people are renters in Hong Kong, so even with a collapse i can see most people holding onto their flats, unless of course they lose their jobs at the same time.

i agree. therefore i think there would be only mild correction rather than collapse - besides price collapse is not something that many ppl want to see this happen.

The severe collapse can only occur if a strong damages occur to
the HK economy.  So far there are no signs of all out war between China and Japan which may cause some prices drops if the bloodshed
starts to spill over to HK.  I am very surprised to see this strong response over what would be the standard medical checkup, and interrogations which is common for such accidents.  Still I wouldn't be too surprised if Japanese factions who want to destroy the Japanese constitution and rebuild Imperial Japan leap at the chance to escalate the situation.  So far I have see bigot Japanese forces attack
several language schools in Japan.  News stories say, Chinese migrant workers were killed in Japan in recent months over what appears to be robbery reasons.

[ Last edited by  chewie10 at 26-9-2010 10:06 ]

Chewie, you must be joking. You area assuming a war between China and Japan. That is a bit far fetched.

The last time HK property prices fell nearly 50% was in 2003 during the SARS crisis. People were moving out of HK and even I went and stayed in NZ for an extended period of time. Back then, lots of people weren't even going to work but working from home. Everyone was wearing face masks and no one even knew how SARS was contracted. Remember Telford Garden? Prices for some units there fell by as much as 60%. It felt like the end of the world for HK. For Macau, property prices were hammered and were 10% below prices in Zhuhai. No one wanted to get onto the boat to Macau or stayed cooped up in a casino where they could contract SARS.  That was a great buying opportunity for Macau and prices have since gone up 3x while in HK prices has only gone up 2x.

[ Last edited by  geoduck at 26-9-2010 10:26 ]

if the lesson of buy low, sell high, then this could signal another opportunity for new buyers or existing owners with cash to pick up some decent priced properties if things fall to the wayside

I hardly think that a 10-20% correction in the property market is worth investing unless you intend to live in the property yourself. You need to buy in a panic like the SARS crisis but these episodes are hard to come by. If the falll is caused by a financial downturn then 10% may not be the bottom. Look at 1998 in HK! Prices first fell by 15% but eroded further over the next two years as interest rates skyrocketed. You can't really pinpoint the bottom but in a panic situation, valuations are all over the place and opportunities abound.

[ Last edited by  geoduck at 26-9-2010 11:15 ]

you are absolutely right and it is very hard to time the market correctly. you will never know whether it will continue to go up or down. When there is a general panic like with SARS then you know that prices will rise afterwards but will people want to go out and look at different properties in such times? I gues most people wanted as little personal contact as possible.

Think China is safe for the time being. Even if they keep on building at the current rate they should be OK for the next 5 years and the Central Govt will do something well before then. With China, they have plenty of buffer. What a lot of people do not realize is that the RMB is not readily tradable and this has spared them from any financial collapse, spared them from the 1998 Asian Financial Crisis and only grazed them in 2008 financial tsunami. As long as China keeps its capital accounts closed and not give way to pressure from the US to revalue the RMB they should be alright.

[ Last edited by  geoduck at 26-9-2010 19:08 ]

It's just in, somebody threw a flare at the Chinese Consulate.  The severe breakdown in Japanese Chinese relations is starting as both sides demands apologies and compensation for the accident.  It looks like the attacks are spreading, it keeps up this should lowered property prices.

I was just watching an housing program from tvb yesterday and was amazed at the prices the houses are asking for in HK ... doubled since 2004!! double .. crazy man ... 10 m for some shitting 2 bedroom place...
Can not see how ppl on normal wages can afford anything now days

I've heard Hong Kong's Yau Ma Tei typhoon shelter a cargo ship was on fire.  Only waste cargo ship.   Many explosion on a 3 alarm fire.  China has slowed sales of rare earth to Japan.  Rare earth used by Japanese to make electronic goods.

What the program didn't tell you is that in 2003, prices had collapsed by as much as 50% because of SARS. Thus, property prices are now only slightly higher than what they were before with the exception of top luxury residential units which are going for about 15-20% more.