October 05, 2004

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Suddenly property in Hong Kong is hot again. The number of transactions jumped by 26% in September from the previous month, and the value of transactions jumped by 34% from August. Year on year the jump in value is a massive 75%. Suddenly all the usual suspects, from real estate agents to property developers, are signalling the boom times are here again. The SCMP reports on a record price for a Mid Levels apartment of more than US$3,500 per square foot. Factors driving this include improved economic outlook, new development launches and the 95 per cent mortgage introduced by the Hong Kong Mortgage Corporation in July and of course speculation. Indeed analysts generally believe that in the mass housing market prices will rise by 10 to 30 per cent next year.

There's one problem. Rents are not rising anywhere near as fast, if at all. What does that matter? Well just like a share reflects the present value of all future dividends so a property price should represent the present value of its rental income (either real or implied). If these rents are unchanged, and that is what the economic data is saying, then rising property prices indicate one of two things. Either investors are prepared to accept a lower return on their investment - this could be possible, but unlikely; or a this is a typical case of excess liquidity spilling over into asset price inflation.

You would have thought Hong Kong learnt the lessons of the 1997 Asia crisis and the subsequent property bust that caused years of economic malaise and deflation. But when a city's financial system is built on speculation, you can only keep animal spirits repressed for so long. In other words, here we go again.

posted by Simon on 10.05.04 at 12:13 PM in the


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Simon's E. Asia Briefing: 2004-10-27
Excerpt: The following is a digest of highlights from the past month's Asia by Blog series over at simonworld.mu.nu. The round-up has four key areas of focus: China, Taiwan & Hong Kong (Politics, Economy & lifestyle, History sport & culture, Information), Korea...
Weblog: Winds of Change.NET
Tracked: October 27, 2004 10:06 AM


Typically as the inflation accelerates, rents are the next to move up. Although US rates are rising they are lagging accelerating inflation. China's inflation is raging as well and they have not raised rates yet either. Hence HK rates have lagged US rates in rising, even as deflation turns to inflation in HK. So locals and PRC nationals have all been pushing prices higher. However, on the margin, people looking to come to HK to work and live (expats and PRC nationals) or just looking to move out of their parents 900 sq ft apt, and now priced out of the buyers mkt, look to rent.

This lagging of rents has serious implications on US inflation indexes going forward. One of the reasons US CPI was low these past few years was that the availability of low mortgage rates encouraged people to buy rather than rent. So rents, which are the measured component in the US CPI for both rent and house prices, were pushing inflation DOWN even with house prices rising. Now that rents are beginning to rise, the downward influence is about to reverse, sending CPI higher even as interest rates rise. Henry Kaufman, in his autobio. notes how Paul Volcker was shocked when he kept raising rates ever more aggressively but the CPI kept climbing, non-plussed. Volcker had to really hit the brakes hard to get inflation under control.

And once again, real rates almost everywhere are neutral to negative ie short term rates are BELOW the inflation rate. Could we see Greenspan more aggressive after the election in the US?

posted by: kennycan on 10.05.04 at 03:20 PM [permalink]

speaking impartially, i think everyone should rush out and buy property immediately, in particular i think flats of about 500 sq ft in or around kennedy town are excellent value.

posted by: giles on 10.05.04 at 06:36 PM [permalink]

Giles talking his book?

posted by: kennycan on 10.06.04 at 01:22 PM [permalink]

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