Only Time Will Tell

May 18, 2008

Despite a further interest rate reduction by the US Federal Reserve. Hong Kong banks have not followed suit. The local banks. like their international counterparts. are facing credit crunch stemmed from the US subprime mortgage woes since last year. It is not easy to make borrowing even in the interbank money market. thus many local banks are not able to lend as much they'd like. The money supply squeeze has thus far affected the local property market as investors find it more difficult to obtain the necessary leverage for normal investment activities. Likewise. the end users market is inevitably adversely affected.

While world economic balance may necessitate a reverse of interest rate reduction of the US Dollar, a tighter credit environment looms large on the horizon. It is envisaged by many that an overall tight money supply situation may be just around the corner. This will have the effect of taking the steam out of the property market, which has enjoyed a bull run since 2003. The cumulative price gain over the period has exceeded 100% in the luxury sector; and in the mass sector it's over 70%. In our last Market Watch, we concluded that low interest rate, among other things, was one of the key underpinning factors for a buoyant property market. If this essential element vanishes, inflation and low supply alone may not be able to prop up the market given a gloomy economic outlook. After 30 years since late 197's. Hong Kong's property market has matured and largely reached a level of equilibrium especially in the mass market sector. There are a bit over one million private domestic units versus similar number of households living in private sector properties. The luxury property market has however "enjoyed" a chronic demand outstripping supply situation, which may not see any appreciable change in the foreseeable future.

But this does not mean that the price of luxury properties will continue its escalation of the last five years indefinitely. Demand in this sector has known to be relatively elastic. succumbing to economic climate change and investment market fluctuations. The tight supply environment may help support the price but counter-balancing this is the bearish market sentiment as a result of the recent world-wide economic slowdowns. Hong Kong has long depended heavily on the US and China for its economic prosperity. When these two major economies are losing steam (though for different reasons). Hong Kong will be affected one way or the other. Moreover. there are other relevant factors in play that will have repercussions on Hong Kong. and the result of a juxtaposition of all this may not be easily understood at the moment. Only time will tell.

By Claudia Hui