Buying homes to evade the devaluation of the Hong Kong dollar

Devaluation of the HKD

The Year of the Dog has arrived! I’d like to start my column by wishing all of you a happy and prosperous new year. In early February, the Hong Kong stock market plummeted following the plunge of U.S. stocks. Since then, bevies of experts and government officials have appeared in the media, warning the public that the housing market is likely to be negatively affected by the stock market, and reminding us that there will probably be more than one (four, to be exact) interest hikes. Personally, there is nothing new or original about these predictions. However, Hong Kong stocks dropping 3,000 points did hurt many stock investors for whom the dream of making a fortune from the stock market and using it as down payment has now drifted out of reach. On the other hand, there are the lucky ones who sold off their stocks in time and yielded enough profits to buy a home but the “warnings” from experts and officials have now made them hesitant to enter the market. The downside of their indecision is that if expert advice fails them and the housing market proves strong in the future, home seekers could suffer losses by keeping their assets in the bank. 

Some would argue that Hong Kong banks are very reliable, so even if the interest rate stays low, you can rest assured that there is virtually no risk in depositing your savings. However, when viewed through a purchasing power angle, I see an entirely different picture. Let’s measure the purchasing power of the Hong Kong dollar using foreign currency exchange rates. The Hong Kong dollar is pegged to the U.S. dollar, so as the U.S. dollar index dropped to a fresh low in 2017, it caused the Hong Kong dollar to depreciate. Comparing year on year, the exchange rate of the Hong Kong dollar against the Euro, GBP and RMB have decreased by 16%, 11.5% and 9.7%, respectively. As a result, goods from the aforementioned countries have become a lot more expensive for those holding a substantial amount of Hong Kong dollar. Reversely, it is roughly 9.7% cheaper to buy Hong Kong property with RMB than with Hong Kong dollar. Additionally, for RMB holders, Hong Kong property prices have only gone up by 3.9% (the property prices in 2017 have increased by about 13.6%, according to Centa-City Leading Index). The figure is a mild 2.1% for pound holders, and -2.4% for Euro holders, which means that Hong Kong property prices have actually dropped.

Therefore, when you lament the soaring home prices, know that the Hong Kong dollar is pegged against the exchange rate system, which has caused its depreciation, is an important culprit that has increased your home buying costs.  

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