Hong Kong Property: Rising Macro Risks16 June, 2011, 15:40. Posted by Zarathustra
Tags: Global, Hong Kong, Macro, Property, Real Estate
The Hong Kong property market has been resilient so far despite the fact that the macro environment is getting increasingly unfavourable. This is not too surprising, as the buyers, analysts and pundits alike are still playing their bullish horns by emphasising that the property market in Hong Kong is a market for 1.3 billion people, and the supply in Hong Kong is limited, thus there is no way that property prices can correct.
This is too superficial.
By looking at the annual supply, combined with the wishful thinking that Chinese buyers will continue to pour in for ever and ever, one is ignoring the fact that Hong Kong economy is extremely sensitive to external shocks, and so does the Hong Kong property market. My bearish stance on Hong Kong property right now has been based on the fact that the Chinese government and People’s Bank of China are tightening policy, which, as a side-effect, also tighten monetary condition in Hong Kong. This has led to increase in mortgage rates by over 100 basis points within the space of 2 months. But there are more global macro risks around that no one is paying attention to.
1. Hard landing of Chinese economy is increasingly likely
My latest assessment on the Chinese economy leads me to believe that a hard landing in Chinese economy is becoming increasingly likely. The latest data points suggest that the Chinese economy is only slowly mildly, but inflation remains quite stubbornly high and may go even higher in the coming months. So far it confirms my conjecture that China needs a recession to stop inflation. As the Chinese authority still place inflation fighting as their top priority, a hard landing is becoming more likely.
A hard landing of the Chinese economy will probably spill over to Hong Kong as Hong Kong is increasingly dependent on the economic growth of China. Also, in the event of hard landing, expect Chinese buyers to stop buying properties in Hong Kong, or even start selling properties in Hong Kong to save their own businesses in China.
2. Eurozone crisis may turn really very ugly
The Eurozone crisis is something the Hong Kong media has ignored, even though it has a real possibility of turning really ugly. The Greek government is facing a solvency issue as they are unable to repay the debt, but to avoid default, European politicians (led by German) is trying to bailout Greece by lending more money to Greece. This is not solving the problem, but simply kicking the can down the road. As Greece is forced to implement austerity measures, Greek people protest, and we are seeing a policy turmoil right now as the Prime Minister George Papandreou reshuffle the cabinet.
If the EU/IMF successfully arranged a bailout within a few weeks, that would buy time to solve a problem which cannot be solved. In the short term, that would probably stabilised the market, but it will come back and haunt us in the future. It is unclear, however, whether Greece can really avoid default and not trigger a credit event.
If Greece default, it will turn into a very ugly European banking crisis, with Greek banking system meltdown and heavy losses in French, German, as well as US banks. And if the fear over the euro crisis trigger any capital outflow from Hong Kong, that will be bad news for Hong Kong property market.
3. Debt Ceiling: a big question mark
The debt ceiling nonsense in the United States is a big question market that I have no idea what will happen if it is not raised by the “deadline”. If the debt ceiling is not raised, one reasoned that the United States will be in a short-lived default with delays of interest payments. Or perhaps it won’t.
4. If Debt Ceiling is cleared, what about strengthening of USD?
On the other hand, if the debt ceiling is raised on time, my conjecture is that the US dollar will strengthen. This is because raising debt ceiling is likely to come with reduction of government spending. The United States is in a balance sheet recession, which means that the private sector is deleveraging, thus throwing liquidity into the system does not create much money because no one is borrowing. If the public sector contracts (and it certainly will), the economic recovery will be threatened, and the environment will be deflationary. The weaker the US economy, the stronger the US dollar.
While I have de-emphasised the relationship between the strength of US dollar and asset prices in Hong Kong, here I have to stress that a stronger US dollar (against all other currencies) means that the Hong Kong dollar will have to strengthen as well (against all other currencies). Under the linked exchange rate system, the way to make Hong Kong dollar strengthen is to contract money supply (if there is no capital inflow to counter that). That will be bad news for Hong Kong property market.
Reiterating Bearish Stance
It is all about capital flows and the macro environment. The macro risks have been escalating in the past few months, particularly in China, which led to my “beginning of the end” call. Now, the macro risks are getting even greater than it was 3 months ago, and I will not be surprised to see capital outflow in the coming months away from Hong Kong.
My 2011 base case call for a 0-10% rise in property prices for the entire 2011. Property prices today is within my bullish case scenario, close to the peak in 1997. My bearish stance has not been changed due to increasing macro risks. I reiterate my base case call for 0-10%, with the lower bound of it more likely, implying a 10%+ correction by the end of this year. Please be warned that if the macro risks escalated in the coming months, I would be prepared to lower my projection even further.