How credit bubble could trigger Hong Kong property collapse

July 15, 2016 14:43
Hong Kong's private property market has had an “M-shaped” growth curve since 2014. It's now in the middle of that cycle. Photo: HKEJ

Hong Kong home prices are likely to rebound in the medium term, mainly due to expectations of renewed easing from the Fed and other major central banks.

If that happens, massive capital could flow back to Hong Kong, pushing up equities and benefiting the property market.

However, a boom cycle similar to the one triggered by QE4 (fourth round of quantitative easing) in the US is unlikely this time given that investors and speculators have largely left the market after the government introduced a series of property tightening measures.

End-users might return to the market. Coupled with rising equities, the move could help boost property prices.

The strength of the rebound will depend on three key factors -- government policy, interest rates and housing supply.

New private housing starts were 13,300 in the first quarter and are expected to hit 30,000 to 40,000 by the end of the year.

That compares with the 1998 peak of of 35,300.

The government has extended the pre-sale consent to 30 months, which means more flats will be available earlier than expected.

Property developers might ramp up the release of new projects if they see property prices creep up.

But will increased supply reverse an uptrend in home prices?

That is unlikely in the near term given that new home sales remain subdued.

New housing sales have a high correlation with prices.

Studies show housing prices typically undergo a correction unless new home sales post dramatic growth.

At present, the 12-month change in the value of new home sales is negative 27 percent, so even if new home sales have been recovering since April, prices are likely to rebound.

Home prices could see a major correction in the second half of 2017 or mid-2018 when new home sales are expected to hit record levels.

But a price slump in 2018 or 2019 could follow. What would trigger it?

Albert Einstein once said insanity is "doing the same thing over and over again and expecting different results”.

That is an apt description of central banks’ money-printing effort.

Central banks around the world have been pumping liquidity into the market since the 2008 financial crisis.

That has done little to boost the real economy and instead pushed up asset prices.

Also, massive monetary easing has created an unprecedented debt and credit bubble for governments and companies.

In most industrial economies, the loan-to-GDP ratio was up by 106 basis points at the end of last year from late 2008.

That means most countries have had faster credit growth than economic growth since the financial crisis.

What’s crazier is that nearly US$11 trillion worth of bonds now have negative yield, a sign that global markets are flooded with liquidity.

Most G10 economies have negative yields for their government bonds except the US.

Various analyses show the global debt market has already entered a bubble phase.

Continued monetary easing by major central banks could push the market to the brink of a crash in investor confidence.

That would deliver an unprecedented shock to global financial markets.

Investors will not take all this sitting down.

They could begin to withdraw massive amounts from bonds and switch to equities and other assets.

The shift in capital flow would drive up bond yields dramatically.

The 10-year US Treasury yield has a negative correlation with Hong Kong home prices.

If investors lose confidence in the bond market, record-low yields could take off.

That would weigh on Hong Kong's housing market.

If the 10-year US Treasury yield rises to 4 percent, the housing price index might slump 100 points, down 60 percent from the current level.

Hong Kong's property market has had an “M-shaped” growth curve since 2014. It's now in the middle of that cycle.

To recap, home prices are likely to rebound in the medium term but a slump is also very possible when the credit bubble bursts.

This article appeared in the Hong Kong Economic Journal on July 14

Translation by Julie Zhu

[Chinese version 中文版]

-- Contact us at [email protected]


Hong Kong Economic Journal chief economist and strategist