Two new housing projects in Hong Kong’s Tsuen Wan district have seen potential buyers lining up in long queues. It’s interpreted as a bullish sign, indicating market demand remains robust.
Still, we must ask this question: are there good reasons to remain positive about the market’s prospects?
To get at the answer, let’s us go back and conduct a review as to what were the principal driving forces of home prices over the past decade.
A key factor has been easy monetary policy.
The 2008 financial crisis was the trigger for massive money-printing by global central banks.
China, for its part, launched a 4-trillion-yuan stimulus package to keep its economy afloat after the crisis broke out. The nation’s broad money supply or M2 has been staying above 13 percent for an extended period as result. Ample liquidity keeps supporting the housing boom.
To prevent the inflation side-effect of easier monetary policy, the Chinese government began to allow more capital to “go out”. Soon, mainland buyers rushed into Hong Kong.
Not only individuals, Chinese developers have also rushed in, aggressively snapping up land plots in Hong Kong in recent years. That has added more fuel to the housing market, already red-hot due to tight supply.
Now, as Chinese authorities have begun shifting to a tighter monetary stance, things are going to change.
Since the fourth quarter of last year, China has openly vowed to tame spiking home prices. Local and central governments have unveiled various tightening measures, and the central bank also tightened monetary supply.
The nation’s M2 growth has tumbled to 9.2 percent in July from 11.8 percent in the middle of last year. And the money supply growth rate is likely to drop further to 8 percent next year. The reduced money supply is bound to affect asset prices.
Chinese authorities had in the past encouraged domestic companies to “go out”. But now they changed the stance and adopted a more stringent approach in approving overseas investments.
Amid this situation, mainland companies may become more cautious in buying land or expanding their presence in Hong Kong.
Hong Kong is a free port for capital to move in and out freely. Therefore, if capital starts to leave, those who are swimming naked will be in trouble when the tide goes out.
Why does the Chinese central bank want to tighten money supply and even restrict capital outflow?
What happened to Japan during its go-go years can perhaps provide a clue.
Japan’s equities, property markets and economic growth were all buoyant in the 1980s, and land prices in Tokyo even exceeded those in New York. Japanese companies aggressively acquired assets overseas amid strengthening Japanese yen.
Having paid top dollars for assets, many Japanese buyers were not able to find takers when they wanted to unload.
China has learned from the bitter lesson of its neighbor.
Interest rate is another key factor determining housing prices.
If income is climbing, slightly higher interest cost may not be a concern. But in Hong Kong, the disposable household income is actually falling amid rising rentals and stagnant wage growth.
If interest expense goes up, property will become increasingly unaffordable.
This article appeared in the Hong Kong Economic Journal on Aug 30
Translation by Julie Zhu
[Chinese version 中文版]
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