Fighting Bubbles: Hong Kong Banks Raises Interest Rates

This should be interesting and may serve as precursor to what will happen worldwide.

From Bloomberg, (bold mine)

HSBC Holdings Plc (HSBA) and Standard Chartered Plc (2888) raised Hong Kong mortgage rates for the first time since 2011, after the banking regulator tightened risk rules on concern a property bubble may undermine financial stability.

The lenders will raise home loan charges priced at the best lending rate by 25 basis points, starting today, they said in separate e-mailed statements yesterday. HSBC mortgages linked to the best rate will climb to a range of 2.85 percent to 3.15 percent, from 2.6 percent to 2.9 percent.

The Hong Kong Monetary Authority last month told banks to set the risk weighting for new residential loans at 15 percent or more, seeking to strengthen buffers after prices doubled to a record in the past four years. Prices may fall by as much as 20 percent over 24 months as mortgage rates increase and the government seeks to cool demand, Deutsche Bank said yesterday.

“Hong Kong banks won’t increase mortgage rates too much, as this would cause home prices to fall, which isn’t good for them,” Dominic Chan, an analyst at BNP Paribas SA in the city, said by telephone today. “With the larger banks increasing rates, the smaller ones will follow suit.”

If a mania has been in place, marginal interest rate increases will hardly prevent people from continuing the leveraged-based yield-chasing process. I have used the recent US housing bubble, as well as Thailand’s pre-Asian crisis as examples.

What happens instead is that as interest rate increases, projects erected behind low interest rates will begin to suffer losses. Bankruptcies then spreads from the periphery to the core or until it reaches a tipping point whereby accrued financial losses morphs into a crisis.

The idea of “modulating” interest rates to “manage” home prices ignores or overlooks the significance of  the market’s psychology, the essence of bubble activities and the basic laws of economics.

Bubbles represent misallocation of resources, which means they are unsustainable and eventually lead to capital losses which will be reflected on the economy.

And monetary tightening essentially exposes on the illusion of policy-induced booms.

As Dr. Frank Shostak writes,

Needless to say, bubble activities are not going to like this since the diversion of real wealth to them from wealth generators will slow down or cease all together.

A fall in economic activity in this case is in fact the demise of various bubble activities.

The demise of various bubble activities usually translates to a domestic crisis.