Like Singapore, I pointed out that incumbent politicians have used symptoms of current bubble (negative real interest rates) policies to impose populist measures which in reality represent gradualist trend towards interventionism. This applies to Hong Kong too.
From Bloomberg,
Hong Kong’s new leader is taking up the battle his predecessor failed to win, seeking to overcome record low mortgage rates and an influx of Chinese buyers to make housing in the world’s most expensive city more affordable.
Leung Chun-ying, the property surveyor who took over as the city’s chief executive in July, on Aug. 30 said he’ll boost the supply of homes and start drafting laws giving preference to locals over buyers from mainland China. He’s trying to cool prices that surged 85 percent since 2009 even as predecessor Donald Tsang raised minimum mortgage deposits, added taxes and increased land sales in a losing bid to stem the boom.
Like Tsang, Leung has had to tweak demand and supply through curbs and land releases rather than monetary policy as Hong Kong’s currency peg to the U.S. dollar pushes borrowing costs to a record low. Banks, including HSBC Holdings Plc (HSBA) and Standard Chartered Plc (STAN), are charging homebuyers an average 2.17 percent, less than half that of six years ago, fueling demand along with the rising wealth of buyers from China’s mainland.
Hong Kong dollar has been pegged to US dollar via the currency board managed by the Hong Kong Monetary Authority. This means that US monetary policies has had significant influences to Hong Kong’s monetary environment which has mainly been vented through a local property boom.
Again from the same article,
U.S. Federal Reserve Chairman Ben Bernanke has pledged to keep interest rates low until at least 2014 and on Aug. 31 made the case for further easing to reduce unemployment in the world’s largest economy. The Hong Kong Monetary Authority keeps its lending rate tied to the Fed to maintain the currency’s peg to the U.S. dollar…
Tsang raised the minimum deposit for some mortgages three times since August 2010, with borrowers now having to put down 40 percent for home purchases of more than HK$7 million ($902,000). He also introduced an additional stamp duty on residential units sold within two years of purchase.
While transactions are down, prices are up. The value of new mortgages fell 42 percent to HK$98.1 billion in the first seven months of this year, while the number of homes sold dropped 22 percent, according to data from the HKMA and the Land Registry. Home prices have gained 12 percent this year, according to Centaline Property Agency Ltd.
BOC Hong Kong Holdings Ltd. (2388), the biggest Hong Kong-based lender, has risen 33 percent this year, the best performer in the 12-member Hang Seng Finance Index. Hang Seng Bank Ltd. (11) has the second best return in the index with 19 percent. The two lenders accounted for a combined 32 percent of the city’s mortgage market, according to mReferral Mortgage Services…
Hong Kong home prices are 65 percent higher than Tokyo’s, the world’s second-priciest place to buy a home, according to a study by Savills Plc (SVS) published last September that compares prices in 10 global cities including New York and London.
Hong Kong’s negative real rate regime has been very pronounced. (chart from Tradingeconomics.com)
Yet instead of dealing with disease, the new leadership will practically will apply the same process of the politicization of land sales and distribution that has not only been ineffective but has promoted charges of cronyism.
As I previously wrote,
While some of Hong Kong’s wealthiest may have made their fortunes from cronyism (or politicized real estate policies), the above critics who resort to claims of “oligopolies and monopolies” that leads to “high prices land policy” and “glorified slavery” fails to recognize that Hong Kong’s property boom has also been influenced by the US Federal Reserve policies via the US dollar peg.
The point is that not only has the easy money policies of the US Federal Reserve been blowing Hong Kong’s bubble cycles, at worst such policies have been gnawing at Hong Kong’s relative free market environment by whetting or stoking on populist anti-market sentiment and the promotion of the mixed economy-welfare state. In short, bubble policies function like a political Trojan horse for destabilization
Hong Kong authorities should deal with the US dollar peg rather than intervene in the marketplace. Perhaps they should consider the proposal, which I earlier noted here, by Prof Joseph Yam, the former head of the Hong Kong Monetary Authority (HKMA), who is also one of the architects of Hong Kong-US dollar peg through a monetary board, to alter Hong Kong’s monetary system by shifting from US dollar peg towards China’s yuan or through a basket of other currencies. They could also consider Yuanization or using mainland currency by scrapping the Hong Kong dollar altogether.
By the way, price actions of Hong Kong’s Hang Seng Index seems ominous.
(chart from Bloomberg)
The bearish head and shoulder pattern may become a reality if Hong Kong’s domestic bubble will implode or if China will endure a recession-financial crisis or if a global recession happens. Incidentally, thanks to Ben Bernanke and his global central bank colleagues, all three factors are seemingly in play.
