Over the past 10 years, whoever is gutsy enough to invest in properties with borrowed money would have chalked up handsome gains.
But can this strategy yield similar results in the coming years? I very much doubt it.
With the Hong Kong currency pegged to the US dollar, local interest rate levels basically follow that of the United States.
As interest rates were kept at a super low level for years despite the relatively booming economy, home prices unsurprisingly skyrocketed.
But following a period of sustained economic recovery, the US Federal Reserve is poised to raise interest rates further this year and next year.
The next Fed chairman may even lean toward tightening.
Meanwhile, Zhou Xiaochuan, China’s central bank governor, has repeatedly said in the past few months that the nation’s monetary policy will tilt toward neutral. That means China’s loose monetary policy will also come to an end.
It’s doubtful if asset prices can sustain the rally if both the US and China start to tightening their monetary policy?
The economy always has its booms and busts. Hong Kong has gone through Asian financial crisis, the bursting of the internet bubble, and the 2008 financial crisis.
The risk of using leverage in investing is that one never really knows when recession will hit.
If caught wrong-footed in such situation, one could be forced to unload the assets at distressed prices when a down cycle suddenly comes.
There are a few negative signs in the home market that investors should pay attention to.
Home prices in the city have posted whopping gains in recent years, but transaction volumes have fallen far behind.
Also, rental prices have been lagging behind home price gains since 2011, which implies that the housing price has already decoupled from the real economy.
The surge in the supply of super-tiny flats in another sign that purchasing power in the market is not strong enough to sustain the current high prices.
With asset prices at a record high and the loose monetary policy expected to end soon, one should seriously question how long the housing boom can sustain.
This article appeared in the Hong Kong Economic Journal on April 5
Translation by Julie Zhu
[Chinese version 中文版]
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