Monday, December 14, 2009

Hong Kong Real Estate: Bulls See 30% Price Gain in 2010

So I read this article in the South China Morning Post on the way back from London to Hong Kong 2 weeks ago and I've been meaning to blog about it. I couldn't find the online copy of it so I'll just copy some interesting tidbits:
"Opinions about the outlook for Hong Kong home prices next year are sharply divided, with the biggest bulls forecasting a repeat of this year's 30 percent price gains, while others caution that prices have already hit the limits of buyer affordability."
So for those of you who are not from Hong Kong, basically for the last year Hong Kong real estate prices have rebounded to 2007 levels, meaning they've gone up A LOT.

To be honest, I haven't really followed the Hong Kong real estate market all year due to my absence. But reading this article really piqued my interest, because the US real estate market has just been in a horrible slump all year - how and why was the Hong Kong real estate market still going up?

I read the following section of the article and began to think:
"Peter Churchouse, a director at hedge fund manager LIM Advisors, said demand for properties in Hong Kong would continue to increase taking into account...economic growth on the mainland, the recovery underway in the Hong Kong economy and the low interest rate environment in the city... 'The US has to keep interest rates low for the time being.' "

Then it hit me, the reasoning was all quite simple: Low interest rates and the weaker US dollar were the culprits.

The Hong Kong dollar is pegged to the US dollar. The RMB has gained strength versus the USD and Hong Kong dollar this year and a rush of people have been taking advantage of this. Amid slower asset growth in the developed countries, people were seeking higher returns - the Hong Kong real estate offers just that.

Interest rates in Hong Kong are basically managed by US monetary policy - which presents a future "problem". As Asian economies (including HK's) recover next year, they will and should hike interest rates to prevent inflation. The US cannot really hike interest rates for a while, especially with unemployment looking to be around 10% for at least most of next year. Most Asian economies have mid to low unemployment rates and are very likely to increase interest rates as soon as the first half of 2010 to prevent serious inflation.

So when next year comes, and if and when Hong Kong's economic growth returns, normal monetary policy would dictate that the Hong Kong government should increase their interest rates. But they can't. What does that mean? Hong Kong's interest rates will be "artificially" low, which means loose monetary policy when it should be tightening. With easy money, money will flow into some kind of high returning assets - and in Hong Kong that usually means real estate.

So I predict that the Hong Kong real estate bubble will continue to bubble further in 2010 due to the soon-to-be "artificially" low interest rates. In the past when Hong Kong's economy ran on "US battery", this was no problem because the two economies usually ran side by side. But now for Hong Kong, it mainly runs on "China battery", and the Chinese economy by all means looks like it's going to run in the opposite direction of the US economy. If Hong Kong doesn't unpeg itself from the US dollar, this could pose some serious problems as inflation goes out of control. Of course, this won't happen for a little while, so enjoy the real estate bubble while it lasts...