Preamble
If not later this week (with the release of the Centa-Citi Index on Friday around 1600 http://hk.centadata.com/cci/cci_e.htm) then at some stage in the very near future we’ll learn that Hong Kong home prices have hit new all-time highs. A little under a year ago I wrote a note* explaining how one of the key drivers, inflation, was likely to remain persistent and how that would lead inevitably to higher prices; and here we are. The question now is where next?
[*If you’re sufficiently interested you can read that here Hong Kong Home Prices]
Summary Conclusion
Hong K
ong home prices are about to make new highs and of all the factors conspiring to produce this result I can’t see any changing, in the short term, to alleviate the situation. Only one, government policy, could supply swift relief if altered.
However, the chances of the Hong Kong government acting in a decisive manner on the supply side of the residential property equation are less than those, IMHO, of seeing porcine aviators appear over the Central district.
Invert Always Invert
Sometimes difficult questions are best addressed by standing them on their head. So where are home prices heading? On the upside? I have no clue, honestly, but it may help to know where they’re not; and why. Rather than speculate on upside let’s spend some time considering how downside is limited; which is perhaps an easier question to address.
I believe Hong Kong home prices are unlikely to fall from present levels for six main reasons.
#1. Hong Kong Home Prices are Unlikely to Fall as long as…
Inflation, the theme of my note last year, remains persistent. The last official reading was a year on year rate of 3.7%. That number though hides sluggish residential rental growth which makes up a large part of the index. I stopped by my favorite herbal tea vendor last Saturday for a cup of Ya Sei Mei (廿四味) and was charged H$8.00, up from H$5.00 just three years ago. 60% over three years is a CAGR of 17% and while not all daily goods have risen by the same amount I can’t think of a single thing that comes into our household on a regular basis that hasn’t gone up smartly in the last three years.
#2. Hong Kong Home Prices are Unlikely to Fall as long as…
Economic growth remains strong. The latest year on year reading was 4.4% but we now have to factor in growth of the nation as a whole to get a better idea of how affordability is being impacted here. Despite the government’s policy of trying to keep the Shanxi coal-barons at bay (shamelessly deflecting attention from their own policy failings) economic progress in China is material to many peripheral buyers in Hong Kong because that’s where so many of us are now making our living.
#3. Hong Kong Home Prices are Unlikely to Fall as long as…
We have no slack in the local economy. I don’t know what our output gap is officially but with unemployment last reported at 3.1% I’d hazard a guess it’s close to zero. Lack of slack feeds back quickly into the first point about inflation and it also encourages those with jobs i.e. nearly all the able bodied population to think and plan with a degree of optimism about the longer term. The ultimate long term economic planning of course being home ownership.
#4. Hong Kong Home Prices are Unlikely to Fall as long as…
Interest rates remain low. I notice on re-reading my earlier note I was plugging in one of the great certainties for this year which hasn’t happened. Everybody knew back then, and with complete certainty, that interest rates were going up this year; but they haven’t. In fact it looks, in part due to the large output gap in the US, that they’re going to be lower for longer than any of us imagined. Even if they rise they may simply turn a negative-real environment into one in which they’re only very slightly positive.
#5. Hong Kong Home Prices are Unlikely to Fall as long as…
We retain the peg to the U$. We’re importing a highly stimulatory monetary policy into an economy that isn’t in need of much of a push. The HKMA is already having to hold the H$ down and has intervened several times in the last month. This may just be a seasonal issue to do with mainland companies needing H$ for dividend payments but it may also be the start of a liquidity surge anticipating higher asset prices. Either way, as long as the peg stays local asset prices will struggle to go down.
#6. Hong Kong Home Prices are Unlikely to Fall as long as…
Government policy, with regard to (lack of) land sales, remains broadly the same. Look out of almost any window in Hong Kong and you see green hills, lots and lots of green hills. As picturesque as this may be one of the housing markets’ biggest problems stares Hongkongers daily in the face. We have an abundance of idle land but government inertia and a desire not to upset even the smallest subset of vested interests means we can’t use it. Shanxi coal-barons my foot; the real problem in the supply demand equation is government controlled supply.
In conclusion
Nobody can know for sure where the price of anything, over the medium to longer term, is headed. In the short term (6~12-months) though Hong Kong home prices are likely to be supported by a combination of powerful factors. Any one of these (inflation for example) could reasonably be expected to put a floor on current prices; but working in combination they add up to a powerful cocktail that’s likely to not only support current levels but work as a justification for higher prices in due course.
This is neither necessarily a good, healthy or desirable outcome. It is though the only way the present equation can be solved; unless or until one or more of the terms highlighted is removed.