Abstract
Between 2003 and 2015 the prices of apartments in Hong Kong (adjusted for inflation) were multiplied by a factor of 3.8. This is more than in the United States prior to the so-called subprime crisis of 2007. The analysis of this speculative episode confirms the mechanism and regularities already highlighted by the present authors in similar episodes that occurred previously in other countries. Based on these regularities, it is possible to predict the price trajectory over the time interval 2016–2025. It suggests that, unless appropriate relief is provided by the mainland, Hong Kong will experience a decade-long slump. This bubble took considerable proportions largely because the currency board system through which Hong Kong interest rates are modeled on US rates made it impossible to “cool the market”. In fact, it resulted in loans with negative real interest rates.
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Source: Rating and Valuation Department of the Hong Kong Government
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Notes
Several instances of speculative frenzy for various items (stocks, collectible books, coins and stamps, houses and apartments) are described (not only qualitatively but also quantitatively) in Roehner (2001), particularly in chapter 5 entitled “Contagion of speculative frenzy”.
Curiously, many economic studies fail to take advantage of the great simplification permitted by this feature. For instance, a study entitled “Is Hong Kong property a bubble?” (http://discount-investing.com) starts by asking “Is there a shortage of new housing?”. There is of course a shortage of new housing in all big cities but this question becomes completely irrelevant during the slump phase of a speculative episode when the market is dominated by a flight away from risky assets falling in value.
This pattern has been observed repeatedly, yet it is still largely overlooked by “experts”. Thus, the predictions offered on the Internet in the case of Hong Kong rarely cover more than one year and we did not find any which covers the next decade.
The average household in the private sector comprises only 2.9 persons.
The dollar estimate can also be compared with an estimate of total residential property in China (including Hong Kong) given in the “International Business Times” (25 January 2016) which is: USD 39 trillion.
These are buildings similar to apartments but built for light industrial activity. In 2014 only about 200,000 square meters were still in use. This area represented 0.4% of the total area of residential real estate. In other words, for a global assessment this category can be omitted.
Perhaps due to the fact that from 2011 to 2015 the interest rate had remained near 2% compared to almost zero in Hong Kong.
Two of the three note-issuing banks are British, namely HSBC and the “Standard Chartered Bank” and one is Chinese (Bank of China).
This is confirmed by the fact that in the early 1990s US economist Steve Hanke, a former “Chief Economic Adviser” to President Reagan, visited South American and East European countries to give advice to their governments on the currency board system. His attempts met temporary success in Argentina, Bulgaria, Estonia, Lithuania and Bosnia-Herzegovina.
As it can hardly be claimed that the Federal Reserve and American arbitragers follow the policy of the HK government, one must conclude that it is the opposite which takes place.
For instance, as was revealed by the flight of Edgar Snowden, US citizens can come to HK without having to ask a Chinese visa. A visa is required only for stays over 3 months.
Paradoxically, in their sovereignty demand, these groups do not seem to mind the fact that Hong Kong interest rates are bound to US rates.
A comparison between the predictions and the actual price trajectories was made in Richmond and Roehner (2013).
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Acknowledgements
The authors wish to express their sincere gratitude to Prof. Qinghai Wang (National University of Singapore) for his interest and useful observations.
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Richmond, P., Roehner, B.M. Property bubble in Hong Kong: A predicted decade-long slump (2016–2025). Evolut Inst Econ Rev 14, 79–99 (2017). https://doi.org/10.1007/s40844-017-0072-7
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DOI: https://doi.org/10.1007/s40844-017-0072-7