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Market feeding perilously on the flow of hot money

(Published by South China Morning Post, 09 Sep 2009)

There is no doubt that Hong Kong’s residential property market has defied all logic, expectations, and global market trends. Property prices for the mass market have risen 15 to 20 per cent since November last year, while the upper-end/luxury market has catapulted ahead anywhere from 25 per cent to 75 per cent.

By contrast, for the past 18 months, beginning with the onset of the recent depression-like market slowdown, residential property markets in developed countries such as the United States, England, Japan and Australia have fallen anywhere from 25 to 60 per cent. Even on the mainland, residential property prices in most major cities have been flat or marginally higher, with Shenzhen the outperformer.

So why has Hong Kong’s property market been such a stand-out exception? One major reason is the unprecedented amount of hot money that has flowed into the territory in the past nine months.

As the Hong Kong dollar is pegged to the US dollar, the Hong Kong Monetary Authority (HKMA) has been forced to intervene each time the currency touched US$7.75. So from September last year until July, the HKMA injected about HK$420 billion into the banking system.

If the special issuances of Exchange Fund bills and notes that drain liquidity from the banking system are deducted, the net aggregate balance as of July is about HK$216 billion.

Although this is one simple measure of the hot money that has flowed into Hong Kong, the amount injected by the HKMA is gargantuan, given the size of the local Hong Kong dollar deposits, which is HK$3.2 trillion (as of June).

While not all of the HK$420 billion has flowed into the residential property market, a large portion of this definitely found its way to many of the new and existing primary residential projects. Since November, about HK$110 billion of mortgages have been originated, resulting in HK$170 billion of property market transactions.

Market reports from the major property agencies have also confirmed that the buyers in up to 40 per cent of all primary market transactions have been non-locals, mainly mainlanders.

As most of these non-locals are unable to qualify for a mortgage and purchase their properties with 100 per cent cash, according to Pan Asian’s research department, the actual dollar value of property transactions from November to July has been a staggering HK$220 billion, or nearly half the amount that the HKMA has injected into the banking system.

Admittedly, some of the hot money flowed into Hong Kong late last year after the HKMA guaranteed an unlimited amount of bank deposits until December 2010. Unfortunately, there is no concrete data to measure how much money flowed into Hong Kong to take advantage of the deposit insurance.

As recently as last week, some property market analysts believed that the market could rise by an additional 30 per cent before the end of the year, and since prices are already at such stratospheric levels with no real fundamental improvement in Hong Kong’s macroeconomic indicators, the re-emergence of an asset bubble is real.

The danger of the recent price appreciation is the swiftness with which money can flow in and out of the territory. As many Asian economies painfully witnessed in the aftermath of the Asian financial crisis in 1997, hot money is not helpful to a country’s long-term growth and potentially is a destabilising factor.

For Hong Kong, while the dollar peg has been extremely useful in maintaining financial market stability for over 25 years, domestic financial markets have had to accept the resulting volatile swings in asset prices (especially the property and stock markets).

If there is anything to be learned from the recent global market meltdown catalysed by the property bubble in the US, it is that Hong Kong’s property market has been feeding dangerously on hot money flows.

As 2010 approaches, when the unlimited deposit insurance is expected to be withdrawn, property owners need to be mindful of the aftermath of the Asian financial crisis, when property prices in Hong Kong fell by nearly 70 per cent from July 1997 to June 2003.

How quickly people forget.

Leland L.Sun

Leland L.Sun
Director and Founder of Pan Asian