Why will the Hong Kong property market keep on booming instead of declining in the near future?

By Ng Tsun Yip (2010280476) Direct interpretations on property market statistics may easily lead us to draw the arbitrary conclusion that the Hong Kong property market is again on the verge of collapse. Indeed, using the 1999 domestic housing price index as base, the index in July, 2010 is almost 150, the number the 1997 index approached (Rating and valuation department, 2010). This looming danger of property market bubble, along with public resent against the rapacious property giants, has compelled the government to propose its nine proposed measures and twelve proposed requirements (Sing Tao Daily, 2010) to curb the seemingly runaway property market boom. Fortunately, the local property market is currently backed by three favourable economic factors. The three factors, which are expected to capture a huge sum of investment funds for the local property market to maintain its vigour, are super-low interest rate designated by the US Federal Reserve Bureau, the unsatisfactory performance of local stock market and the Macro-economic Control in China. The following essay attempts to discuss why these three factors will make the local property market attractive to investors amongst a variety of investment alternatives and prolong its boom at least temporarily, on the condition that these factors will not be altered very shortly. We will begin by analysing the simple mechanism of how property price is governed by the investment returns from other investment alternatives. After that, we will proceed to analyse the effects of the factors mentioned above one by one. There exists an apparent negative relationship between the property market price and the expected returns from other investment alternatives as investment goods are
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substitutes to each other. Firstly, demand for investment goods is tightly connected to their expected returns. The higher the investment returns from a good, the larger would be the demand for it, thereby pushing its price upward. Given a specific amount of investment fund endowment, an investor chooses between different investment options. A fall in returns from an investment good tends to boost the demand for others because the latter are now deemed as investment substitutes as they are now relatively more profitable, given that their anticipated returns keep constant. In a word, rational maximising investors incline to choose relatively profitable investment portfolios. The local interest rate is now subject to the US super-low interest rate, which depletes paybacks from major interest bearing investment goods like bank deposits and securities. This consolidates the status of the local property market as an attractive investment option. In Hong Kong, for the purpose of maintaining the linked rate system, local interest rate has to be linked to the US one to prevent capital inflows upsetting the market for Hong Kong dollar (Dodsworth and Mihaljek, 1997). At present, however, the US Federal Reserve Board has no intension to lift the so-called super low interest rate. The Americans have to keep the rate low to exhaust the benefits from its monetary policy. Nevertheless, the situation in the US is still gloomy despite US$300billion to simulate its economy. Unemployment rate still approaches ten there. (Bureau of labour statistics of the United States, 2010) Uncertain US prospect prompts the Hong Kong government to follow suit, resulting in prolonged interest rate nadir. With interest bearing deposits being unattractive to investors, the now booming property market will continue to flourish so long as the US still finds its economic problems intractable. Low interest rate aside, the stagnant performance of stock market further boosts

investment demand for housing. Over the past 10 month the market appears to be quite volatile, with the peak Heng Sang Index reaching about 22500 and the low reaching approximately 19000. The difference of the two is eminent. The index on 3 October, 2010(22358.17) just catches up with that of the beginning of the year. Risk combined with stagnant return growth in the stock market only makes the booming property market more exceptional in performance. Macroeconomic control in China featured by deterrent measures on Chinas property market is another indispensible factor supporting the Hong Kong property market in the near future. Beijing is already steeping up measures to rein its property market in. To demonstrate the central governments determination in curbing Chinese property market bubble, the state council has announced an increase in housing deposit from 40% of the price of property to be purchased to 50% and a 1.1 times increase in mortgage loan interest (Businesstimes, 2010). More capital inflows from China to Hong Kong property market is likely the case in the near future as expected incomes form China property market becomes uncertain. Logically Hong Kong property market is to maintain vigour for a period of time. Hong Kong as a small-scale economy compared to states like the US lacks monetary autonomy. Combined with its adherence to the linked rate system, there is no doubt that Hong Kong interest rate will remain low due to US unwillingness to lift its rates. Stagnant Heng Sang Index growth as well as China macroeconomic control further discourage capital from leaving the local property market. Bound by these three, we may expect the property market to keep thriving at least in the short run if in the nearest future the three factors remain unchanged.

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1. Bureau of labour statistics, (2010) Employment situation summary. Retrieved from http://www.bls.gov/news.release/empsit.nr0.htm 2. Businesstimes, (2010, April 3) The central government swears to curb the property bubble. Retrieved from http://www.businesstimes.com.hk/a-2010041666916/Sub-prime-fang-dai-gao-lou-jia 3. Dodsworth, J., Mihaljek, D (1997) Hong Kong, China: growth, structural change, and economic stability during the transition. New York, International Monetary Fund 4. Rating and valuation department, (2010) Price indexes for Hong Kong property market. Retrieved form http://www.rvd.gov.hk/en/doc/statistics/graph2.pdf 5. Sing Tao Daily, (2010, June 1) Nine proposed measures and twelve proposed requirements enacted today. Sing Tao Daily, p.1

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