Can Hong Kong Pull Off a Soft Landing?

Beijing's financial authorities have tried to cool off property markets in Shenzhen, Shanghai, and other mainland cities by raising interest rates and urging banks to be far more discerning about real estate loans. In Hong Kong, where property prices are also on a tear, the government is trying a different approach: accelerating sales from its vast land holdings to expand supply and rein in home prices.

Hong Kong home prices are up 42 percent since the start of 2009, due in part to interest rates hovering at a two-decade low and a local economy expected to grow 5.7 percent this year. Prices may rise 10 percent in the second half of this year, according to a forecast by property consultant Jones Lang LaSalle (JLL). The Hang Seng Property Index, which tracks the stock price of seven of the city's biggest developers, has risen 11 percent in the past six months, compared with a 4.9 percent gain in the benchmark Hang Seng Index. "Property prices are at a fairly high level right now," said Peter Wong, HSBC Holdings' (HSB) chief executive for Asia Pacific, in an Aug. 3 interview with Bloomberg TV. "If it continues to increase, it may form a bubble."

Preventing that outcome is tricky for the former British territory, which since 1997 has operated as a special administrative region of China and has long run its own government and monetary policy. Simply raising interest rates isn't an option, because the Hong Kong dollar is pegged to the U.S. greenback. To manage that currency peg, the Hong Kong Monetary Authority has followed the Federal Reserve's lead on monetary policy and kept its benchmark base rate at 0.5 percent since November 2008.

In July the government sold a residential site in the city's luxurious Peak district for HK$10.4 billion ($1.3 billion). It will auction off other sites in Hong Kong's Kowloon and Kowloon Tong neighborhoods in the second half of August. After these scheduled sales, the government in the first eight months of the year will have sold land that could accommodate 11,200 apartments (most of Hong Kong's housing stock consists of flats). In both 2008 and 2009, sales were just 7,500 units for the whole year. Since almost all homes are in high-rises that usually take at least four years to complete, greater supply won't translate into more apartments until 2014 at the earliest.

The Hong Kong government on Aug. 10 ordered real estate companies to improve the transparency of property transactions. The government has launched an investigation of Henderson Land Development, controlled by billionaire Lee Shau-kee, over the cancellation of the sale of 20 luxury flats, including one that would have set a sales record. When announced last fall, the deal buoyed Hong Kong's luxury residential market. In another move to slow things down, the government in April implemented a new transaction fee of 4.25 percent on properties worth more than HK$20 million, or $2.5 million. Henderson has denied any wrongdoing.

As for the broader market dynamics, not everyone buys the bubble scenario. Ultra-low interest rates mean the average household spends less than 40 percent of its income to finance property, vs. 90 percent back in 1997. Also, a wave of new buyers willing to pay in cash from the mainland shows no sign of dissipating.

Still, Hong Kong Chief Executive Donald Tsang, the top government official, wants to avoid a replay of 1997, when home prices rose to dizzying levels, then crashed. Hong Kong's current average home price is about 15 times average household income, says Nicole Wong, an analyst with CLSA Asia-Pacific Markets in Hong Kong. The last time prices were that high was right before the 1997 crash. "A lot of people are finding prices very difficult to comprehend," says Wong.

The bottom line: To avert a property bubble, the Hong Kong government is selling off part of its vast land holdings to boost supply.

    Before it's here, it's on the Bloomberg Terminal.