Hong Kong is at risk of an abrupt decline in house prices after they doubled to a record in the past four years, climbing 20 percent in 2012 even as the economy cooled, the International Monetary Fund said.
“The property sector is the main source of domestic economic risk,” the IMF said in a report on the city released today. At the same time, the odds of a slump that has major economic and financial consequences is “fairly low in the near term,” the fund said.
Hong Kong’s apartment prices have surged to become the world’s most expensive after low interest rates and limited supply fueled demand, prompting the government to tighten mortgage lending and add taxes. Since taking office in July, Chief Executive Leung Chun-ying imposed three rounds of curbs, including an extra 15 percent tax on buyers from overseas, and officials have signaled more measures are possible.
“The sharp run-up in house prices raises the risk of an abrupt correction,” the IMF said in the report. The property sector represents half of outstanding loans for use in Hong Kong, with additional risks from the use of real estate as collateral, it said.
The city should mantain its currency peg, the IMF said. Economic growth may rebound to about 3 percent in 2013, up from an estimated 1.25 percent this year, the fund said. Inflation may average 3.75 percent this year and 3.5 percent next year.
This year’s house price increase has defied “the general slowdown in economic activity,” the report said.
Concerns about the affordability and supply of housing “will take time to address,” Steven Barnett, the fund’s Hong Kong mission chief, said in a Bloomberg Television interview from Washington. While measures such as stamp duties may have a short-term effect, “in the long run, it’s really about increasing supply,” he said.
Hong Kong needs to make hard choices about the use of land and how much countryside is needed, Leung said Dec. 6.
The dollar peg is still the “best arrangement” for the special administrative region and “warrants continued support,” Barnett said, calling the system “transparent and credible.”
Hong Kong linked its exchange rate to the dollar in 1983 when negotiations between China and the U.K. over the city’s return to Chinese rule spurred capital outflows. The system ties monetary policy to that of the U.S., where the Federal Reserve is using near-zero interest rates to aid a recovery.
“Hong Kong really has the preconditions to maintain the system,” he said. “It has flexible markets, robust and proactive financial oversight, and a very healthy fiscal position.”