IF Hong Kong real estate were a stock, investors might have reason to start getting worried. Home prices rallied this year, reaching within about 1% of their 2019 record before retreating in the first week of July, according to a widely followed index compiled by Centaline Property Agency Ltd.
That leaves the chart looking like the dreaded “triple top”, a bearish technical indicator in the equity market.
More importantly, the global macro conditions that have buoyed the city’s housing prices during their long boom show signs of turning.
Anxiety alert
Hong Kong home prices have risen to within 1% of their 2019 record.
The United States on Tuesday posted its highest inflation in three decades, excluding food and fuel. That casts doubt on whether the recent run-up in consumer prices is a temporary result of post-pandemic reopening, and puts pressure on the Federal Reserve (Fed) to consider scaling back the extraordinary monetary stimulus used to support the economy through the Covid-19 outbreak.
US monetary policy is a critical factor for Hong Kong asset prices because of the city’s currency peg to the dollar. M2 money supply in the US expanded by close to US$5 trillion (RM21 trillion), or 32%, in the 16 months through May this year.
Hong Kong’s M2 has broadly followed the same trend. It grew 23% from a year earlier in January, the fastest pace since the eve of the global financial crisis in October 2007.
Show me the money supply
Hong Kong’s M2 growth has tracked that of the US, with greater volatility.
The Fed’s unprecedented easing arrived just as Hong Kong’s housing prices might have appeared vulnerable – after a year of sometimes violent pro-democracy protests, and when pandemic shutdowns were starting to paralyse the economy.
Movements in two key measures of financial-market liquidity – the Hong Kong Monetary Authority’s aggregate balance and the one-month interbank rate – showed how dramatically conditions shifted as the US central bank started to loosen the taps. The one-month Hong Kong inter-bank offered rate or Hibor has dwindled to almost zero from a 2019 peak of almost 3%. That directly reduces funding costs for home buyers in the city, where more than nine out of 10 of mortgages are linked to the interbank rate.
It’s the liquidity guys
The Fed has kept coming to the aid of Hong Kong asset prices.
Growth in US money supply is already falling sharply, decelerating to 13.8% in May from a year earlier, half the pace of the 27% increase in February.
While that’s still a robust rate, and well above the 5.8% average for the decade through 2019, changes at the margin are often what matters for financial markets – and the inflation spike gives an incentive to keep on bringing growth down.
There’s a chill wind blowing
US money supply growth is decelerating fast.
What of other factors? There are many, and discerning their relative importance isn’t necessarily easy (otherwise we’d all be rich).
On the positive side, Hong Kong has a structural shortage of housing that isn’t going to be solved anytime soon, if ever. That helps to keep domestic demand strong, even in the face of prudential measures aimed at restraining prices and protecting banks, such as restrictive loan-to-value ratios.
Animal spirits look healthy, to judge by the number of weekend project sales by developers that have sold out this year. That’s an anecdotal indicator, to be sure, though a significant one.
The negative side of the ledger appears more crowded. Hong Kong may have passed its heyday as an international financial centre, along with the era of globalisation itself, as decades of rapprochement between China and the US go into reverse.
Tens of thousands of residents are emigrating after Beijing passed a national security law last year.
The US has sanctioned Chinese and Hong Kong officials, and the Biden administration will warn American companies this week of the increasing risks of operating in the city, the Financial Times reported Tuesday. Hong Kong’s rule of law, a vital pillar of confidence for foreign investors, looks less assured than in the past.
Arguably, more than enough mainland residents will arrive to replace the emigrants, though bright graduates may choose to go elsewhere.
Mainland arrivals will find a city that is becoming increasingly monocultural, and where a security-focused administration is deploying an array of tools to keep a restive population in check.
Beijing, Shanghai or Shenzhen may offer a more relaxed, and fun, experience – and probably more promising real estate investments.
Hong Kong’s housing market can’t be completely separated from the performance of the economy, which is recovering, albeit patchily.
Having tracked each other closely for the past two decades, home prices and retail rents have parted company recently. Retail rents are down close to 12% from their 2019 peak. That’s another reason for caution on the residential outlook.
Who’s minding the shop?
Retail rents have fallen 12% from their peak while home prices are still close to a record.
Animal spirits themselves are an ephemeral thing. Demand has a habit of evaporating once prices start to go down. It might not take much to convince buyers that they should wait for a more reasonable opportunity once the market turns.
Then again, predicting the demise of the world’s least affordable home market has been a graveyard for bearish pundits for many years.
Prices rose six-fold between their 2003 trough and the 2019 peak, based on the Centa-City index. The crash keeps on not happening.
Perhaps the market is just taking a breather before the next leg up to another record.
In the meantime, watch the Fed. ― Bloomberg
Matthew Brooker is a columnist and editor with Bloomberg Opinion. The views expressed here are the writer’s own.
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