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What do asset and fund shortages mean to the housing market

Generally speaking, assets bring cash income to the owner. Home buying, for example, is a common method for Hong Kong people to obtain assets; they can have properties for personal use, lease them out to collect rent money or resell them for a profit. Hongkongers love buying residential properties; according to government sources, more than half of Hong Kong families live in a housing unit that they own. However, any asset can appreciate or depreciate due to market volatility, in which asset shortage and fund shortage play an important role.

For Hong Kong, the most impactful case of asset shortage in recent memory took place in late 2008, when the US subprime mortgage meltdown had triggered the devastating financial crisis and recession. In an effort to salvage the market, the Federal Reserve launched quantitative easing and kept interest rates at an extremely low level for years. What happened next was that huge amounts of hot money flowed from the US to emerging markets around the globe in search of investment opportunities. The then US Secretary of State, Hilary Clinton, flew to Beijing for an emergency meeting with Chinese leaders and appealed for China’s support in a global effort to save the world economy. Rumour has it that to this end, the Chinese government rolled out a RMB 4 trillion stimulus package, while aggressively initiating and implementing infrastructure projects and expansionary fiscal policies. Thus, excess funds from mainland China and hot money from the US and Europe rushed into Hong Kong’s housing market at the same time, exacerbating the housing shortage. Before long, home prices started to skyrocket at an impossible speed and the government scrambled to launch cooling measures in an attempt to rein in the market.

While the root of this problem is overflowing funds and extremely low mortgage interest rates, it was definitely worsened by the fact that there was a lack of investment channels for these funds, which was concentrated in the housing market and caused home prices to soar. This is a phenomenon known as an asset shortage, which has been the chief culprit of skyrocketing global housing prices.

But every party must come to an end. Last year, the Fed’s interest rate hikes started to attract overseas funds to return to the US, while its balance sheet reduction is tightening the money supply. As a result, we have recently been seeing signs of a shortage of funds. At the moment, the US 10-year Treasury yield has edged above the 3% mark, attracting funds to flow back to the US while causing currency depreciation and rising interest rates in emerging markets around the world. Hong Kong has also raised interest rates in the past months to subside the outflows, and if more frequent interest rate hikes occur in the future, it will mean that the city’s money shortage has aggravated and Hong Kong is in urgent need of funds.

To put it simply, asset shortage is a key factor in Hong Kong’s surging home prices, while the fund shortage that’s in the making will help curb the housing market and subsequently force the prices to continue its drop.