Real Estate

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Hong Kong property investors thought they could pick up pennies in front of the steamroller called the Federal Reserve. No longer.

U.S. short-term rates were climbing hard even before Donald Trump's victory. Interbank liquidity in the city was more than abundant, however, thanks to capital fleeing a weakening Chinese currency to the safety of the pegged Hong Kong dollar.

All that's changed. With the Fed delivering on a December rate increase, and projecting as many as three for 2017, there's fear that Hong Kong banks, which rely on cheap money to serve up attractively priced mortgages on unaffordable homes, will run out of dough.

Just two months ago, the discount on Hong Kong dollar interest rates over their U.S. dollar counterparts was at its deepest in more than six years. It's taken just four days to crunch the gap to almost zero.

Say Hello to the Fed
Hong Kong interbank rates have been forced to catch up with U.S. rates after refusing to follow them higher in the third quarter
Source: Bloomberg

If decoupling from the Fed was prompting home buyers to feel irrationally optimistic, the recoupling will have its own effects. Hong Kong property prices have more than quadrupled since the end of the 2003 SARS outbreak. The increase in the past few years occurred in spite of progressively harsher taxes, duties and other curbs on purchases.

Similar cooling measures have worked well in rival Singapore, which has two other advantages. The first is a somewhat more flexible currency, which the authorities move around in an undisclosed band to prevent financial conditions from becoming too tight or loose. By contrast, Hong Kong's hard dollar peg makes its real-estate market more prone to boom-bust cycles.

Singapore's second advantage is that, while it too has seen a lot of home-buying interest from China, the mainland isn't at the island nation's doorstep.

Hong Kong can't possibly make shoe-box apartments as fast as Chinese investors want them. The 30 percent stamp duty the city slapped last month on foreign buyers has seen shares of property developers, including Li Ka-shing’s Cheung Kong Property Holdings Ltd., swoon. But as Gadfly noted, frenzied buying left authorities with little choice.

Wall of Worry
Hong Kong developers' sliding shares raise doubts on the longevity of the property bubble
Source: Bloomberg
*January 2010 = 100

Builders may step up price discounts, although with the Fed's steamroller coming closer, new buyers are likely to ignore the property pennies and seek safer assets. As for existing homeowners, rising loan-servicing costs could evoke unpleasant memories. Between 1998 and 2002, a strong greenback brought deflation -- and underwater mortgages -- to Hong Kong.

Given the extent of speculation since then, the property blues this time could be as bad or worse.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net