22 October 2016
A strengthening US dollar would exert pressure on the Hong Kong housing market. Photo: HKEJ
A strengthening US dollar would exert pressure on the Hong Kong housing market. Photo: HKEJ

What’s the impact of Brexit on Hong Kong’s housing market?

While the shock of the Brexit vote has led to turmoil in global markets, some believe that housing prices in Hong Kong may stage a rebound as the United Kingdom leaves the European Union.

Is there some truth to such an expectation?

Brexit has already exerted considerable turbulence across global equity and currency markets.

It is even feared that other EU members may follow suit and hold a similar referendum on their EU membership.

Also, Scotland and Northern Ireland are seeking independence from the UK to remain in the EU.

Definitely, the EU has become a great source of uncertainties, and will continue to do so in the days to come.

Nevertheless, some believe the “Black Swan” event could be a boon for Hong Kong’s housing market, which is likely to bottom out soon.

Such a belief is anchored on three main points.

First, capital will flee Europe and flow into Asia, given that Brexit is only a prelude to bigger storm in the continent.

Asia, including Hong Kong, will benefit as investors will look at the region as a safe haven.

Investors from mainland China, in particular, may prefer to park their money in Hong Kong amid the heightened market volatility.

Second, the Federal Reserve is unlikely to hike interest rates, and may in fact cut rates. The Brexit vote has disturbed the timetable of Fed in raising rates, and thus it may hold off a further rate hike in its next meeting.

Before Brexit, the market was expecting another rate hike in the United States within this year as indicated by Fed funds rate. However, the latest Fed funds rate showed a zero chance of a US rate hike for the rest of this year while the odds for a rate cut have soared to 8 percent as of June 29.

Third, major central banks may kick off another round of monetary easing and fiscal stimulus measures in response to the rising risk of global recession.

If so, fresh money-printing moves are expected to inflate prices of various asset classes, including Hong Kong property.

Indeed, investors are set to withdraw capital from Europe amid its gloomy economic growth outlook.

However, capital may not necessarily flow into Asia. Financial markets are likely to remain in a risk-averse environment until central banks launch further quantitative easing measures.

In that sense, the US market – US treasuries, in particular – is the top destination for investors looking for a safe haven during a volatile period.

If so, the US dollar, or the US Dollar Index, may stage another rally following Brexit.

The euro and the sterling, as well as the Asia Dollar Index and emerging market capital flows, have all tumbled in the wake of the Brexit vote.

Meanwhile, the US dollar index surged to a three-month high of nearly 97 from a low of 93, in a sign that money is flowing back to the US market.

It still takes some time to confirm that capital is flowing into the US.

As I’ve noted before, the US dollar index has a close negative correlation of 0.51 with the housing price in Hong Kong, and the former has a lead time of around 18 months over the latter.

If the US dollar regained some strength, it would exert pressure on the Hong Kong housing market.

As to a Fed rate cut, there is very limited room to do so.

We should focus more on the real mortgage rate in Hong Kong, which moves in opposite direction with the housing price.

The city’s latest real mortgage rate is around negative 0.2 percent, compared with 0.4 percent in September last year.

Even if the Fed cuts its fund rate to zero, it would have minimum impact on the real mortgage rate in Hong Kong, unless the inflation rate shows a marked decline in the city.

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

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Hong Kong Economic Journal chief economist and strategist

EJI Weekly Newsletter