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Home > Blogs > Anthony Harrington > IMF gives Hong Kong a lesson in deflating property bubbles

IMF gives Hong Kong a lesson in deflating property bubbles

Finance Blogger: Anthony Harrington Anthony Harrington

The IMF country inspection team concluded its visit to Hong Kong at the end of October. It found the People’s Republic of China Special Administrative Region (a committee-inspired name if ever there was one) in high expansionary mode with a property bubble developing thanks to fast-rising credit growth.

However, the IMF was not perturbed. Housing is becoming very expensive for Hong Kong’s less affluent citizens, but the former British colony has a number of good things going for it. In particular, the IMF points to a resurgent economy and the new-found willingness on the part of the Chinese authorities to allow Hong Kong-domiciled banks to settle transactions in the renminbi. This latter point bodes extremely well for Hong Kong’s financial services sector, which is already a force to be reckoned with (see my earlier blog post “China loosens its grip on the renminbi - just a tad.”)

Hong Kong has some large, long-running public infrastructure schemes going, which are pumping money into the economy and will continue to do so for a few years yet. On top of this, exports through the ex-colony are booming and private investment in machinery and equipment is getting back to pre-crash levels.

A return to rapid growth, however, brings with it inflationary dangers, somewhat exacerbated by strong capital inflows. A lot of money washing through the SAR (special administrative region) and limited build prospects are pushing real estate prices up quite sharply, not just in the affluent sector but in the mass market as well. Tight supply and abundant liquidity inevitably mean prices chasing upwards.

Over the last 18 months, prices in the more expensive sectors have swelled to 10% above the levels reached in the previous property boom in 1997 and growth of property prices is currently running at 20% year-on-year. Similarly, in the mass market, price levels are heading for their historic peaks. The IMF points out that this is hurting people less now than in 1997 since interest rates are much lower and wages are higher, making property still more affordable than in the late 1990s. But the trend is worrying.

What Hong Kong needs to do, the IMF says, is to follow the steps that any administration would take to defuse a property bubble. At its press conference the IMF spelled this out in some detail. Nigel Chalk, the IMF mission chief to Hong Kong, said that the way to avoid “macro-economic instability” aka a property bust that hammers the general economy—and the case of Ireland should demonstrate the dangers of this graphically—lies with decisive policy adjustments.

The Hong Kong government has already taken some important steps, such as lowering the loan-to-value ratio for property, which knocks speculative over-borrowing on the head, and applying more conservative debt service ratios, so that banks can be more confident in borrowers’ ability to finance their debts. Addressing the supply side by making more land available for developers to build houses on is another positive move the government is taking, but it should also look at taxation, the IMF suggests.

The government has increased stamp duties but it could do so more stringently, particularly on high-price, luxury properties, which would make it more expensive for property speculators. Piling on the Hong Kong equivalent of the council tax would be another good move. Put all these things into action and Hong Kong—and countries everywhere—could really damp down a property asset bubble without cutting the legs off the general economy. A shame the US government, or the Irish Government, or the UK or Spanish governments, for that matter, didn’t get these tools out the tool bag before the 2008 crash went into full swing…

Further reading on Asian economies:



Tags: banking , bubble , China , economic recovery , Hong Kong , IMF , inflation , real estate
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