The UK referendum will impact capital flows in Europe and interest rate policy in the US, and may also have a knock-on effect on Hong Kong’s property market.
A key thing to watch in the wake of the Brexit vote will be moves by major central banks around the world.
Will they start printing money again to pump more liquidity into the system and offset perceived economic risks?
I predicted late last year that the Fed and other major central banks may launch another round of quantitative easing (QE) this year, as global economic growth remains fragile and there is rising risk of recession in some places.
Following the Brexit vote, the uncertainties have only increased.
The Bank of England announced Tuesday that the counter cyclical capital buffer rate for UK banks has been cut to zero with immediate effect, reversing a decision taken in March to raise it to 0.5 percent.
Bank of Japan and the European Central Bank, meanwhile, are also mulling further monetary easing measures.
The UK’s decision to leave the European Union will prompt the Fed to dial back its rate hike schedule, or even consider QE4 if the external economic environment deteriorates further.
It’s hard to say when the US central bank will make its next move. In my view, policymakers might remain on hold until the last quarter of this year, given the presidential election in November.
If so, will Hong Kong housing prices get a boost?
Well, the answer is yes and no.
Secondary home prices in the city could bounce back to the peak seen in last September, but will then fall back again.
If Fed decides to launch further monetary stimulus, the scale must be really huge if it is to have any significant impact.
If there is another round of QE in the US, it will ripple into the Hong Kong housing market in two ways. The property market will get a boost from a surge in equity prices and increased capital inflow into the city.
Studies show that the US equity market has high close correlation with the Fed’s monetary easing policy. US and Hong Kong stock markets will rally if there is another round of QE. That, in turn, will help push up Hong Kong’s housing prices.
It is worth bearing in mind that Hong Kong’s monetary base has expanded even faster than that of the US and Japan since mid-2008.
That was mainly due to US monetary easing, which forced Hong Kong to loosen its own monetary policy.
Now, if there are new QE measures, fresh capital may flood into Hong Kong and push up asset prices, including in the property market.
However, the rally may not sustain given the fact that property developers have a large number of flats to sell, and as interest rates are also poised to rise at some point.
In the first quarter of this year, private residential construction starts reached 13,300, compared with 14,200 units throughout 2015, according to data from the Buildings Department. The figure for the full year may reach over 50,000.
It usually takes 3 to 4 years for the flats to become available for buyers. The government has extended the pre-sale consent period from 20 months to 30 months since mid-2013, and it promised to accelerate approval of pre-sale consent.
As a result, the time lag has shortened to 1 to 2 years. Given this, a large quantity of new supply will hit the market in 2017 and 2018.
Bond yields usually spike up every time the Fed starts monetary easing. It’s the so-called thumb rule of “buy the rumor, sell the fact.” Capital will flow from bonds to equities.
A strong upturn in bond yields may push up mortgage rates and weigh on home prices.
This article appeared in the Hong Kong Economic Journal on July 7.
Translation by Julie Zhu
[Chinese version 中文版]
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