Big Picture

January 18, 2008

Successive financial and administrative measures to reign in the runaway stock and property markets on the Mainland are beginning to take their toll. In major cities like Beijing. Shanghai, Guangzhou and Shenzhen, property transactions plummeted and forced many property agents out of business, some of which have nation-wide agency networks. On the other side of the globe, the US is fretting a recession as Wall Street braces for one of its worst quarterly losses in history. In an effort to contain the aftermath of sub prime mortgage woes, the Bush administration is preparing for a series of salvation plans.

Whether it’s dampening in the East or stimulating in the West, both will have profound impacts on the respective economies and will certainly stir up repercussions world-wide. Hong Kong has always been dependent on the two economies for its sustained prosperity, and has become more susceptible to change of climate in Mainland China. With a weak US Dollar and overheated economy across the border, inflation is beginning to exert its negative impacts on Hong Kong. The situation is exacerbated by the fact that interest rate will continue to drop, as the Hong Kong Dollar will have to follow the US interest rate cut due to the peg. A repeat of the negative interest rate environment in the early 1990’s looms large. Last time when Hong Kong experienced this situation, property prices were driven to unsustainable historical high levels for a few years before the bubble finally burst in 1997, eliminating tens of billions of wealth and forced one-fifth property owners into negative equity. Will history repeat itself this time around?

The current situation is somewhat different from the early 1990’s. Supply remains tight and in fact, 2007 saw only 10.500 residential units completed (against an average of over 20.000 in the last ten years), the lowest in the last three decades. The price of mass residential property today is still comfortably affordable. The economic growth in recent years has added impetus to the large buying force. In the high end market. the tight supply situation is even more acute. with demand outstripping supply for properties over 1.500 square feet. The lacklustre Hong Kong stock market will only serve to drive some of the capital to property market, which benefits from inflation, low interest rate and a chronic shortage of supply. We foresee that in the next 6 to 12 months real estate investment will steal the lime light and mass residential property price will soon recover its loss since 1997.

By K. S. Koh