US Stock market downturn put Hong Kong market to the test

Financial experts often say that Americans like to invest their wealth in the stock markets while the Chinese put theirs in real estate. With the two countries now engaged in an intense trade war, both sides are carefully guarding their economies, hoping their rival will collapse before they do.

This could explain why President Trump has lashed out at the Federal Reserve for raising interest rates once again despite the recent US stock market plunge. On December 21, 2018, the Dow plummeted 414 points to 22,445, suffering its deepest single-week decline since October 2008. Such poor stock performances bring to mind the 2008 Global Financial Crisis and indeed, if the stock turmoil continues, the world economy could be at risk of another financial meltdown.

Once Hong Kong stocks are affected by recession, there’s no way the city’s housing market can remain unscathed. If that happens, home prices will drop at a faster pace than anyone can anticipate. Take 2008, when Hong Kong housing prices fell by 30% in a short three-month period.

At the moment, of course, it is too early to panic about a possible US stock market crash, not to mention China has a greater influence on the Hong Kong economy than ever before; for example, Chinese equities now account for over 60% of the total capitalisation of the Hong Kong stock market. Therefore, even if US stocks do collapse, as long as the Chinese economy manages a soft landing, the Hong Kong home market shouldn’t be in too much trouble. As China recently cut some banks’ statutory reserve requirements to spur growth and with Hong Kong’s Money Supply M3 staying steadily above HK$14 trillion, a major bank decided to adjust its mortgage interest rate despite the Fed announcing another rate hike on December 20, hoping that it could use this opportunity to expand its mortgage market share.

Chinese funds are becoming more prevalent and influential in the Hong Kong economy, and major Chinese consortiums have established themselves as key players in Hong Kong’s real estate market. If a financial downturn occurs, foreign capital will return to their home countries, which will pose a good opportunity for Chinese money to gain more ground in Hong Kong. In spite of the current sluggish sales and record low secondary market prices, 
I have reason to believe that Hong Kong’s housing demand will stay strong in the long term, and that buyers are just taking a momentary pause to observe and strategise before making their return to the market.