24 October 2016
Hong Kong's housing bubble may burst between 2017 and 2019. Photo: HKEJ
Hong Kong's housing bubble may burst between 2017 and 2019. Photo: HKEJ

What if HK home prices fall for the next five years?

I’ve noted earlier that the US Federal Reserve should have announced the liftoff in its meeting on Sept. 17.

That should have removed the uncertainties relating to the rate hike and probably helped the US and European markets to post a rebound.

However, the liftoff did not occur, and the market watched closely how the Fed explained the delay.

Unfortunately, institutions like the International Monetary Fund, G20, as well as economists like Lawrence Summers had expressed their views on the delayed liftoff.

The Fed cited financial market risk to explain its decision, and the US and European markets fell.

Still, Janet Yellen and other Fed officials assured that the rate hike would occur this year, and that helped the US and European markets to rebound.

The US central bank made a mistake in not fully understanding that China’s stocks and currency have already stabilized. It also underestimated the impact of the uncertainty regarding the rate hike.

Meanwhile, the Fed indicated a gradual and slow pace for inflation pickup and rate hike.

That being the case, my previous warnings that the Fed liftoff could trigger a crisis in emerging markets and a property bubble burst in Hong Kong may not occur in 2016.

However, US interest rates may continue to rise in 2017, and the housing bubble in Hong Kong is already too big.

Governments in emerging economies are not capable enough to address these hidden crises.

The housing bubble in Hong Kong may still burst between 2017 and 2019, during which emerging markets would get battered as well.

I’ve noted earlier that the housing market would slump by 60 to 75 percent.

People should draw a lesson from the 1997 financial crisis when housing prices dropped by as much as 75 percent.

Investors should not buy property this year or in 2016 in light of a slight drop in housing prices.

Some have asked whether they should start returning to the housing market if it falls 20 to 30 percent.

In fact, the Hong Kong government does not have policy tools to stem further price falls because it does not have an independent monetary policy.

As a small open economy, Hong Kong has very limited options to offset the negative effects of falling property prices on consumption and investment.

No one would want to buy property when prices are sliding, even if the government scraps previous tightening measures.

Simply speaking, the housing market may go through several rounds of declines with some modest rebounds, and eventually the market would slump by 70 to 75 percent.

Besides, the economic recession may last five to eight years as the government lacks sufficient policy tools to restore economic growth.

Homebuyers should stay away from the market during the first two years of the recession cycle.

Ironically, not too many people have the money or courage to buy property if housing prices slump by 70 percent due to the high unemployment rate.

By then, other assets like shops, offices, parking lots, taxi licenses and stocks would all also plunge.

Investors should reduce their holdings of these assets in next 12 months and increase cash positions to prepare for the housing bubble burst.

This article appeared in the Hong Kong Economic Journal on Sept. 30.

Translation by Julie Zhu

[Chinese version中文版]

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Associate Professor, Division of Economics, School of Humanities and Social Sciences at Nanyang Technological University

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