menu

Hong Kong Housing Boom

The low interest rates intended to stimulate the recessed US economy after the US housing bust in 2007 – 2009 have inadvertently led to a housing boom in Hong Kong when Hong Kong has to lower its interest rates to defend its dollar peg.

K. K. Fung

While the US housing market is busting, the Hong Kong housing market half a world away is booming. Two luxury apartments went on the market in late 2009 for $38.7 million each. At $9,677 per square foot, they are the most expensive apartments in the world. Apartment prices in the Hong Kong mass market have also gone up by double digits from 10% to 14% a year. The urban property price to household income ratio jumped from 8.5 times to over 10 times over a period of 6 months in 2009.

Paradoxically, Hong Kong’s housing boom is caused by the US housing bust. Because the Hong Kong dollar is pegged to the US dollar, the almost zero% US short-term interest rate intended to boost the US economy has also forced the Hong Kong short-term interest rate to fall in step.* Although mortgage rates are long-term rates, the very low short-term rates nevertheless helped pull down the mortgage rates. A typical Hong Kong mortgage interest in early 2008 was only 3.1%.

With inflation running at 3.1% per year, the real mortgage rate was actually negative. In fact, the monthly mortgage notes were lower than the monthly rent of apartments. Thus apartments were a good inflation hedge. The Chinese government’s attempt to stimulate its recessing economy provided further credit fuel for Chinese speculative buyers to buy up Hong Kong apartments. Indeed, half of the buyers of luxury apartments in Hong Kong in late 2009 were reportedly mainland Chinese. US private-equity funds are also looking for a quick buck speculating in the property market using cheap US dollars without fear of any currency exchange risk.

The housing boom in Hong Kong does not mean the Hong Kong economy has escaped the global recession. The unemployment rate remains high (5.4%) by Hong Kong standard and retail sales dropped 5.5% year-on-year in July 2009.

Notes:

  1. When the Hong Kong dollar is pegged to the US dollar, one US dollar will buy more or less the same constant units of Hong Kong dollar or vice versa. That means if the interest rates in US dollars are low, the interest rates in Hong Kong dollars have to be low to prevent currency speculation. Otherwise, currency speculators can convert the currency that carries lower interest rates into the pegged currency that carries higher interest rates to pocket the interest-rate differential. This speculative currency movement would destabilize the dollar peg.
  2. Update: 4/21/2015. Hong Kong's dollar peg has attracted Russian inflow of US dollars and Russian corporate interests to open banking accounts to avoid American sanctions related to the Russian Ukraine incursions. Since the Russian corporates operate in a dollar-based economy, the dollar-pegged Hong Kong dollar thus provides a convenient back door. The receiving banks in Hong Kong are not Western banks but Chinese financial institutions. "Hong Kong respected UN sanctions, but there was normally no obligation under city laws for financial institutions to comply with sanctions issued by other jurisdictions." SCMP. 9/15/2014. <a href="http://www.scmp.com/business/banking-finance/article/1592673/russian-money-flows-hong-kong-following-imposition-western">Russian hot money flows into Hong Kong after West slaps sanctions on Moscow</a>

References:

Glossary:

  • nominal vs real
    A nominal value is expressed in historical money terms. By contrast, a real value has been adjusted from a nominal value to remove the effects of general price level changes from the base reference year.
  • real interest rate
    It is the difference between the nominal interest rate and the inflation rate. The real interest rate could be negative if the inflation rate is higher than the nominal interest rate.
  • real vs nominal
    A nominal value is expressed in historical money terms. By contrast, a real value has been adjusted from a nominal value to remove the effects of general price level changes from the base reference year.

Topics:

Trade and Foreign Exchange, Money and Credit, Boom and Bust

Keywords

apartment, dollar peg, foreign exchange, housing boom, housing bust, inflation, mortgage, real interest rates