28 October 2016
Those who think home prices will continue falling assume the Federal Reserve will raise interest rates soon. Photo: HKEJ
Those who think home prices will continue falling assume the Federal Reserve will raise interest rates soon. Photo: HKEJ

The biggest blind spot in property analysis

Hong Kong’s real estate market has started to cool down recently, arousing heated debate on whether the trend will continue.

In this article, rather than expressing my opinion on the property market, I want to discuss the attitudes of analysts.

Those who have concluded that home prices will continue falling assume that the US Federal Reserve will raise interest rates soon.

While “jumping on the bandwagon” is no good, finding reasons to support their conclusions is also wrong.

Several months ago, nearly half of the American economists asserted the Fed rate hike cycle would start before the middle of the year. But now we don’t even know whether the rise will happen by the end of the year.

Factors that support global economy recovery are not stable yet. Many countries are still relying on the easing of monetary policy while inflation remains weak. So it’s not urgent to raise interest rates.

The United States is likely to raise rates no later than early next year, but the hike should be moderate.

Staying rational and acquiring a comprehensive understanding of the situation are the foundations of good analysis. However, those are not easy things to do.

While immersed in their own reasoning process, some people ignore other people’s point of view.

Those who bought certain stocks will tend to say how good the companies they have chosen and those that are not in their portfolios are likely to go down in short run.

Their biggest mistake is usually not how well they did their analysis, but their belief that they are always right.

If you refuse to understand why others hold opposite views, you are biased. If you are biased, your so-called “independent thinking” is meaningless.

When interest rates don’t rise, that doesn’t necessarily mean home prices will not fall. Because aside from interest rates, household income and home supply are also crucial factors that determine home prices. 

Since the global financial crisis, central banks have been printing huge amounts of money, leading to the outstanding performance of the retail sector and supporting the steady growth of economies for years.

However, after mainland officials stopped their extravagant spending of public funds in the wake of the anti-corruption campaign, commercial property rents in some key shopping areas fell.

In addition, the stronger dollar has made Hong Kong products less attractive in terms of price.

How can Hongkongers’ income not be affected?

The city’s home price to household income ratio is already one of the highest in the world. When income decreases, the ratio will surge further.

On the other hand, housing supply is improving.

Isn’t it a joke to rush into the property market at this time?

Above all, there are no more positive messages for the real estate market.

1) Interest rate will only go up.

2) Household income may not increase, and the possibility is huge that it will fall.

3) Housing supply is increasing but the valuation is high.

Home prices are on the edge of a deep correction. I would recommend that investors wait two or three years before buying new homes, that is, after the prices have returned to a reasonable level.

Understanding other people’s opinions and introspection are the first steps to independent thinking.

This article appeared in the Hong Kong Economic Journal on Oct. 23.

Translation by Myssie You

[Chinese version中文版]

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Columnist at the Hong Kong Economic Journal

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