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Weakening Hong Kong dollar dampens the property market

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In recent months, the Hong Kong dollar has been continuously falling. Last week, it was close to hitting 7.85 per U.S. dollar, the lower limit of its trading band. During an interview, the Hong Kong Monetary Authority’s Chief Executive, Norman Chan, said that the HKMA will be ready to intervene when it hits the 7.85 mark. Chan seems to be confident in the HKMA’s ability to control the situation, and was not worried about the fact that once funds flow away from Hong Kong there could be a sudden spike in the bank interest rate, which will make a big impact on the investment market. Perhaps Chan is hoping for an expedited arrival of an interest hike to cool down the domestic housing market, which has seen prices soaring for years.

Looking through the Census and Statistics Department’s money supply data the other day, I had a sudden realisation that, as of this January, the M3 total has increased to HK$14.1 trillion, breaking M3 records. What’s more alarming is that during this time, the U.S. has been reducing its balance sheet and increasing interest, which prompted experts to predict that funds would start to flow out of Hong Kong. Instead, local banks have seen an increase in funds. Sitting on an enormous number of savings, banks were reluctant to pay interests to account owners, and decided to lower the HIBOR to compete for a share in the property mortgage market, a move that has thrown off a lot of home buyers. In fact, since the U.S. Fed’s announcement of balance sheet reduction and interest hikes, many Hong Kong homeseekers have delayed their purchase timeline, because they wanted to observe the interest hikes’ impact on the housing market before making their decisions. A number of them were hoping that the increased interest would curb housing prices, and thus reduce their housing costs.

However, the reality is that despite the continued deterioration of the Hong Kong dollar, there has been no sign of shrinkage in local savings. Some suspect that it’s because the amount of mainland funds brought into Hong Kong through the stock market is far greater than funds that are flowing back overseas. In any case, if local bank savings continue to accumulate, the expedited interest hike will not deliver its promises, which explains why several bank executives have expressed that Hong Kong would only start to feel the pressure to raise the interest rate in the second half of the year at the earliest.

That is more than three months away. With banks unable to make solid predications, Trump not offering a clear vision on his “America First” policy, and Sino-U.S. relations experiencing recent friction, Hong Kong home buyers are choosing to not enter the market as they find it too volatile and unpredictable at the moment. In addition, the Hong Kong government doesn’t seem to have the intention to introduce sound policies to help people own homes. As a result, homeseekers with sufficient funds do not see the appeal of rushing into the market.

Indeed, if hot money starts to flow away from Hong Kong, it would help the HKMA speed up the increase in lending rate, which would subsequently curb the public’s home buying desires in a roundabout way, achieving the goal of cooling the market.