Wednesday, November 28, 2012

Hong Kong’s Parking Lot Bubble

I previously pointed out how Hong Kong’s recently imposed property curbs, which essentially are capital controls, would compound or intensify on the distortions and nasty side-effects from its currency peg on the US dollar.

We seem to be getting more evidence on this

Sovereign Man Chief Investment Strategist Tim Staermose notes of how Hong Kong’s currency peg and property curbs (capital controls) have found a new, if not an additional object of policy induced bubbles: Parking Lots.
In another absurd example of what happens when unrestrained money printing meets idiotic government taxes, the price of parking spaces at a suburban apartment complex some 40 minutes from central Hong Kong is now HK$1.3 million, or approximately US$168,000.

There are two key factors driving this lunacy–

1) the tidal wave of money from across the Pacific as a result of the Federal Reserve’s QE infinity policy; and,

2) the Hong Kong government’s misguided attempts to control the property bubble here.

A few weeks ago, as we reported, the government snuck in 15% stamp duty tax affecting foreign buyers, plus a property tax increase, in hopes of snuffing out property speculation. Yet all they did was send the speculative money flows into things such as parking spaces instead, which are not affected by the tax hikes.

Hong Kong is flush with liquidity. The Hong Kong dollar is pegged to the US dollar at the rate of 7.80 +/- a very narrow band, which means that whenever the US Federal Reserve prints money, the Hong Kong Monetary Authority must also print money in order to keep up.

Interest rates here are effectively zero. And there are consequences to making money available for nothing.

All of the hundreds of billions of new Hong Kong dollars floating around in the system has to end up somewhere, and in recent years, much of it has ended up in Hong Kong’s property market.

Property prices in Hong Kong are the most expensive in the world. Recently a 6,200 square foot apartment sold for $62 million (USD), a mind boggling $10,000 per square foot.
Both the US dollar peg and capital controls through property curbs signify as a fatal cocktail mix to Hong Kong's free market economy. As I previously wrote, 
Inflationism essentially sow the seeds for protectionism through various forms of interventionism as capital controls. On the other hand, protectionism fosters antagonism. Central banking policies, thus, promotes social instability even in what used to be economically free nations.
Now if for every action there is an equal and opposite reaction according to Sir Isaac Newton's third law of motion, then expect that for every (artificially induced) boom, a bust will be the natural reaction. 

That's the nature of the fiat paper money system, promoted and operated by central banks.

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