21 November 2018
Without notable fund outflows, property prices in Hong Kong are likely to remain firm. Photo: HKEJ
Without notable fund outflows, property prices in Hong Kong are likely to remain firm. Photo: HKEJ

US treasury yield holds key to HK home prices

We’ve discussed several factors that may trigger a U-turn in Hong Kong’s housing market and concluded that home prices may hit a peak and fall off in third or fourth quarter of this year.

But even if that happens, the correction is expected to be quite mild because of one important reason: the persistent inflow of capital into Hong Kong has yet to reverse.

If you will recall, the US Federal Reserve launched monetary easing measures after the 2008 financial crisis.

As a result, Hong Kong’s monetary base surged 340 percent as of late 2015, while that of the United States was up 380 percent.

However, Hong Kong’s monetary base has not retreated along with that of the US, although the Fed has started to tighten its monetary policy.

Instead, massive mainland capital has flooded into the territory since the one-off currency depreciation in mainland China in August 2015.

As a result, the city’s monetary base further spiked to HK$1.65 trillion as of March 28, compared with less than HK$350 billion in 2008.

That represents an increase of four times or HK$1.3 trillion.

The pace of fund inflow may have slowed following successive Fed hikes and
China’s measures to stem capital outflow, but the market is still flush with liquidity.

To reverse the fund flow pattern, the US Treasury yield would be the key.

Fed’s monetary easing policy over the last eight years has fueled a treasury market boom.

The treasury yield has been squeezed to extremely low levels. As of December 2016, the outstanding US treasury bonds increased to US$16 trillion.

But given the rising inflation pressure, investors are set to reduce US treasury exposure in the coming years.

In fact, Japan and China, the two largest holders of US treasuries, have cut their holdings to the lowest since financial crisis.

The US treasury market will face mounting selling pressure, pushing up the 10-year treasury bond yield to over 3 percent within the next one to two years.

When that happens, spiking treasury yields would trigger a notable capital outflow from Hong Kong, which would bring about a more serious pullback of home prices.

This article appeared in the Hong Kong Economic Journal on March 30

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Hong Kong Economic Journal chief economist and strategist

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