What will happen to property prices in HK if the HKD/USD peg goes?

Hi,


I am wondering what will happen to Hong Kong property prices if the HKD/USD peg goes away? As Joseph Yam, who once was its fiercest proponent recently changed his mind.


So my argument is that they will drop significantly as Interest rates do not have to mirror the low USA ones. So move to HKD cash and then your money will increase in Dollar terms?


Please let me know your thoughts, and tell me if you think it will happen. New government, new policy.

My thoughts I think I've mentioned in a previous thread.. Pasted here for reference:


Posted by elsdon (6 days ago)


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Yes, sold off properties in 2011.. Holding HKD now.


Whether you call it a depeg, or a repeg, or whatever you want.. It's a necessity I think to stop the silly inflation of the HKD due to the USD link. I'm not the only one who sees it this way.


It'll impact the housing market negatively because the HKD will immediately appreciate in value, which makes foreign investment in HK not as attractive.


As mentioned in this thread as well, it permits the HKMA to allow people to save money again and not force them into the housing market with their 0% interest rates on bank deposits. Rising interest rates would force a number of people out of the housing market, as their rental yields will be killed, or people marginally paying (not many but enough to start a landslide) will be forced to sell.


It'll make buying a pain as well as mortgage rates will trend up with interest rates.. Effectively, It'll force people to live within their means..


Posted by mallani (6 days ago)


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elsdon, I don't understand:


1) why would housing prices drop if there is a repeg? If you have a property, you have no interest in selling. Suddenly your house is worth more in US$ and you want to sell at a loss? Why? I understand if you suddenly have enough money for retirement, and you decide to take your cash and go to Thailand, but otherwise why would you?


Would fewer foreigners buy properties in HK? Why? They might hope for a new repeg some time in the future, and buy a new property now. Why would a repeg make foreign investment in HK less attractive???


2) Rising interest rates would lead to lower housing, but make it more expensive monthly, so what would be the benefit to the people, either owners, buyers, renters, or anybody???


I agree that a repeg might happen in the near or not so near future. Can anybody guess (looking at the fundamentals) how much repeg there might be? I can live with 5%, but 10-20% would be painful, and I might change back to the HK$!


Posted by elsdon (6 days ago)


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mallani,


Perhaps there's something I'm missing here.. A repeg/depeg would effectively increase the purchasing power of the HKD, and decrease the purchasing power of every other currency relative to the HKD. One of the major reasons we see foreign investment in HK today is due to the fact that it's unnaturally inexpensive compared to the relative strength so we would realize less of that. It's less attractive because it'd be relatively more expensive for foreign currencies to invest in Hong Kong, hence a lower demand to do so.


2) Rising interest rates would allow the people to hold their money in bank deposit savings again and have a 'safer' vehicle for their money. Right now, the inflation rate is way out of wack with the interest rate. You typically see a correlation between these values in a 'normal' environment, and we've experienced a larger decoupling of the two in HK for the past few years.. The US needed zero interest rates because they simply cant afford to raise it, HK can. It's forced many people to invest their money in asset classes that they may originally not of, and have greater exposure to things they initially know nothing about.


In terms of the repeg.. It comes down to what we're pegging to I think.. If it's the USD again, I'd say the HKD is easily 10% undervalued right now against the USD.. if it's a basket of currencies, depends on the basket I think.. But, I expect a 10-20% appreciation at the very least, and should be at parity with the RMB again.


Posted by mallani (6 days ago)


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elsdon,


1: yes, I agree that maybe fewer foreigners would buy new HK properties, but why would those who have them already sell at a discount?


On the other hand, properties in Thailand, Philippines, etc. are cheaper than HK, and I don't see people going there to buy. I see them buying in HK because of the potential for growth here (and safety, predictability, etc.). So, again, why would more a expensive HK$ stop people from buying? Or then now more Americans should buy houses in Greece, because the Euro has gone.


2: I agree.


Thanks.


Posted by elsdon (3 days ago)


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mallani,


1: Not necessarily sell at a discount, but sell to lock profits in and hedge against interest rate hikes. Smart ones, at least. If depeg/repeg to anything not the USD, I expect interest rates to go up. If you have enough 'smart' investors selling in this wake, its simply supply and demand after that causing a 'discount'.

My two cents....


The US is maintaining interest rates at 0 (ZIRP) because their economy is in a shambles... they are trying to restart growth with the same easy money policy that got them into this mess in the first place (it is not working)


HK being pegged to the USD follows US monetary policy therefore our interest rates follow the US.


However the HK economy is not in a shambles... it has been growing...


So maintaining these low interest rates are actually contributing to an over-heating of the economy (HK property prices have skyrocketed in less than two years and now are the most expensive in the world)...


Additionally... the weak USD/HKD makes imports more expensive... and HK imports almost everything... so inflation is high.


So if HK depegs... I have to assume interest rates come off record lows to something that reflects economic conditions here... in China rates are 6%... so perhaps that is a reasonable benchmark?



Judging from comments on this forum... many people have bought properties under the assumption that interest rates will remain very low indefinitely... so I suspect there are some nasty surprises lurking out there as mortgage payments increase dramatically making it difficult for some to make payments...


Conclusion: depegging would likely result in a rise in interest rates which would dampen HK property sales... and push down prices...

How likely do you think this is? Does the new Government want the property marjet to stabilise or fall?? With depeg it will likely lead to a substantial decrease in the property prices, not a very popular move in HK?

I believe there is a saying... that only fools and economists believe they can predict the future with accuracy... I (think) I am neither. Of course there are thousands of both out there making predictions... a few will guess right and be heralded as the geniuses - that they are not... so be wary.


I think the government is concerned about the steep rises in property prices over the past couple of years and do not want to see another '1997' crash...


Coming off the peg would be a massive decision as it would impact confidence in America (and have other implications for HK) so it wouldn't be made lightly...


The only thing that is for certain is there will be zero warning. The decision will be made over a weekend... and announced 'effective immediately' on a Monday morning...

I can't see it happening unless there is a direct order from Beijing. No bureaucrat would have the nerve. Joseph Yam only spoke up when he had left the civil service.

Zero warning for us maybe, plenty of warning for the big guys in town. Better to watch what those guys are up to like a hawk.

For a good background on the role of financial centres and finance generally and its impact on economic prosperity, Niall Fergusson "The Ascent of Money", Bernstein "The Birth of Plenty" and Beinhocker "The Origin of Wealth" all contain good explanations.


As to depegging or repegging - CY Leung's reappointment of John Tsang is a cause for concern - the rate at which that buffoon is wasting Hong Kong's reserves is truely staggering. Clearly a student of the Greek school of economic thought.

ballerz. Trouble is if we de-peg it would involve all sorts of turmoil with pensions and company funding. The HK$ would probably become like the Swiss franc in times of turmoil and it would shoot up in value putting thousands out of work. I don't like the peg but I'm sure it's here to stay. CY Leung won't rock the boat. Agree with traineeinvestor over John Tsang. I described him HK's worst financial secretary, a statement immediately disputed by Ed, but at partially backed up by Tom Holland in today's SCMP Monitor Column.

what exactly is the problem with john tsang? During his tenure, there has been an 80% increase in home prices, which most of us on this board probably appreciate. As for the reserves, isnt the goverment running a surplus? I keep getting checks in the mail and various rebates on everything. Doesn't seem so bad to me. Whats the cause of the grief?

I believe the problem with Tsang is that he is calling the market 'over-heated'... 'a bubble'...


That is blasphemous...

Liebster. The increase was the market returning to where is used to be. It's only up 4% over a 15-year period. You can't expect the cheap times to continue after a recession. I suspect a lot of this complaining about high property prices is sour grapes. Property was cheap for a period of 15 years and now that period is over. If you were here, you had over a decade to buy. You could pick up properties with as little at HK$50,000 down. Now you can't.

loyd,


that doesnt explain the problem you and investortrainee have with john tsang. I for one am certainly not complaining about the increase in property prices.

@liebster - the main issues with John Tsang are (i) he has massively increased government spending (about 80% - much much higher than GDP growth). This has only been sustainable because government tax revenues have grown hugely due to the good economic conditions HK has experienced during his term in office. He has put is in a position where we would either need to cut hand outs severely during a downturn or run down our reserves (neither of which is good) (ii) his inflation fighting measures are more likely to have added to inflationary pressures than to provide real relief (iii) he has no idea how to estimate the surplus/deficit each year - if I got my personal numbers as badly wrong as he does each year I would either be broke or a billionaire (iv) he has increased the divide between the minority who contribute tax revenue and the majority who feed off that tax revenue adding to the fiscal instability of HK's tax base (like California - see High Beta Wealth).


As to the increase in property prices - part of me would have preferred them to stay down - at least at a level where the yields would be more attractive. The bottom line for me is that the combination of rental income and dividends will support my retirement - lower prices are better for me than higher prices (feel good factor nothwithstanding). (Not that John Tsang had much to do with current property prices.)