Yes, Hong Kong Property is a bubble, so?28 January, 2011, 18:48. Posted by Zarathustra
Tags: Bubble, Hong Kong, Property, Real Estate
It seems that we have had too many stories these day on how expensive Hong Kong real estate is. After the survey that put Hong Kong home prices at the top spot in the world, Savills reiterate the findings of Demographia that Hong Kong is the most expensive place to buy real estate (compared with London, New York and Moscow). Today, the widely watched Centa-City Leading Index showed that home prices in Hong Kong Island has already reached the previous peak level in 1997. There are many people who wish to justify the expensive prices Hong Kong property prices, and there are even more people who argue that real estate prices in Hong Kong are at an unsustainably high level a.k.a. bubble.
I have made it quite clear in my own 2011 Hong Kong Property Forecast that fundamentals of Hong Kong real estate market are not as strong as people think. Population growth is slow, so the idea that there is a supply shortage is, in my view, nonsense. People who keep on suggesting that the Hong Kong government should increase land supply is really missing the point. Household income barely grows, which makes home prices ever more expensive relative to income. But just because it is a bubble does not mean that it cannot stay there as a bubble for long.
The only thing that sustains the current level of home prices is record low interest rate, which was made possible by the quantitative easing in the United States as Hong Kong dollar is pegged with US dollar, and the inflow of money from the Mainland. Clearly, the current ultra-low interest rates are not sustainable. The question is when interest rate is going to rise, or when the money flow will become unfavourable to Hong Kong real estate market. Money may stay around longer than we like to see, but it can also leave more quickly than we feel comfortable.
In November, for instance, money supply in terms of both M1 and M2 shrank on an month-on-month basis. We will be getting the money supply figure for December from the Hong Kong Monetary Authority next week, and at that time, we will see if the out-flow of money we saw in November 2010 is becoming a trend. If so, for whatever reasons that money flows away, that will ring the alarm bell for Hong Kong property market.