The consequences of the US quantitative easing are beginning to manifest themselves. The recent record high use of reverse repo by the Fed, for example, shows that the US banking system is flooded with excess overnight funds that have to be parked back to the Fed facility. It is true that the Fed’s continuous quantitative measures will seriously distort the performance of the asset market, such as the upsurge in US stocks and the speculation in commodity prices in the past few quarters, all of which demonstrate the ill effects of too much liquidity in pursuit of limited assets. However, the author is most worried that the property market around the world is heating up much faster than expected. It is difficult to support such unrealistic property prices at the current pace of economic recovery. Once there is a major adjustment in the property market, the real economy will inevitably be shaken, and the ultimate victim will again only be the general public.

Compared to the US property market, recent property prices in Hong Kong have been quite restrained. According to the 20-city composite index, part of the Case–Shiller home price indices developed by the three economists Allan Weiss, Karl Case, and Robert Shiller, the current US property prices have surpassed the historical high of April 2006 by about 22%. The second-hand property prices in Hong Kong, on the other hand, are still lower than the historical high by about 3%. This reflects that so far the US quantitative easing and ultra-low interest rate policy have not generated much traction for local property prices. With that said, it appears that the local property market has begun to trend higher, judging by the apparent rise in the number of second-hand residential transactions in recent months, coupled with the booming sales of first-hand properties.

Many people are surprised by the rise in local property prices because the Hong Kong economy has been in a state of strain after the social movements and epidemics of the past two years. However, we should bear in mind that even though the local economy has entered a recession for six consecutive quarters since the third quarter of 2019, secondary property prices have only adjusted by 8%, indicating that there is limited room for a significant correction in the property market given the imbalance between supply and demand.

The local property market is heating up recently, and the author believes there are three reasons for this:

The average number of private residential units sold in the past two years was only 17,250, which is still not enough to keep up with the strong demand in the market. In addition, soon after she took office, Carrie Lam adjusted the public/private split for new housing supply under the Long Term Housing Strategy (LTHS) from 60:40 to 70:30, which undoubtedly contributed to higher private housing prices. However, since local property prices already top the world, a downward movement in private housing supply will only make it more difficult to adjust property prices. Carrie Lam’s housing market logic is truly remarkable. With her around, Hong Kong’s property prices simply cannot not go up.

After the social movement, many immigration experts expect a mass migration wave in Hong Kong, which will eventually drag down the performance of the property market. As a matter of fact, people who understand the thinking of the central government should understand that this exodus will not affect Beijing’s position on Hong Kong at all, because it can use mainlanders to replace the number of migrants, that is, with liquidity from the north, property prices will hardly fall in the short term.

Lastly, the macro environment is another factor that is driving up property prices. Hong Kong maintains a linked exchange rate system that is pegged to the US dollar. When the US lowers interest rates significantly, Hong Kong must follow suit. When the interest rate is at a very low level, capital will naturally flow into the property market, injecting momentum into property prices.

It is certainly not conducive to people’s livelihood when property prices are soaring, but, unfortunately, Carrie Lam does not understand the way of governance, so we should not expect this Chief Executive to be able to cool down the local property market.

(Kwan Cheuk-chiu, economist, director of ACE Centre for Business and Economic Research)

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