Getting the Diagnosis Right: Avoiding a Housing Price Bubble in Hong Kong SAR
IMF Blog, December 21, 2010
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Bibliographic details
- Authors: Nigel Chalk
- Published: December 21, 2010
Overview and context
- Author and date: Nigel Chalk, December 21, 2010.
- Recent developments: "the average cost of an apartment in Hong Kong has risen by almost 20 percent in the past year alone."
- Broader context: This rise contrasts with a "dismal outlook for real estate markets in the industrial countries" noted in the World Economic Outlook, and Hong Kong has been a destination for an "extraordinary amount of global capital" over the past two years.
Key findings and drivers of price increases
- Exchange rate regime:
- The Linked Exchange Rate System is implicated by some, but the author argues this is a "misdiagnosis."
- No other fixed exchange rate arrangement has seen inflows on the scale Hong Kong experienced.
- Rising property prices are not unique to Hong Kong; many Asian economies with different exchange rate regimes have seen house price increases.
- Capital inflows and local strength:
- Motivation for large inflows reflects the "strength and resilience of the local economy"—Hong Kong is both a vibrant market for new equity issuance and a safe haven for international capital.
- Inflows are in many ways "a symptom of Hong Kong’s economic success."
- Interest rates and mortgage expansion:
- Low interest rates, "imported courtesy of the link between the Hong Kong and U.S. currencies," have contributed by making mortgages cheaper.
- "Mortgage lending has expanded by almost 15 percent over the past year."
- Demand and supply factors:
- Strong demand from Mainland Chinese investors and high net worth professionals moving to Hong Kong’s expanding financial services industry.
- Tight current supply conditions; construction is underway but "it will take time before those new units actually hit the market."
Assessment of the Linked Exchange Rate System
- Historical performance: The Linked Exchange Rate System "has, time and again and for more than 27 years, shown itself to be a robust anchor of monetary and financial stability."
- Policy implication: Changing the exchange rate regime is unlikely to solve higher housing costs; the exchange rate is only part of the story.
Policy recommendations (targeted measures for the property market)
- Strengthen lending standards to protect financial system integrity:
- Require higher downpayments for home purchases.
- Impose more conservative limits on the share of a borrower’s income that can be used to service their mortgage.
- Increase transaction costs to deter short-term speculation:
- Raise stamp duties.
- Impose penalties for cancelling primary market transactions.
- Increase property taxes.
- Expand residential land supply:
- Support efforts to increase land for residential development.
- The new government steering committee on housing land supply has committed to making available enough land to build "20,000 new private residential units annually over the next decade."
Risk assessment and recommended stance
- Urgency: "A rising risk of a housing bubble in Hong Kong should not be ignored."
- Strategy: Use a countervailing policy response "that is proportional to the risks."
- Recent measures: Government announcements to "further lower loan-to-value ratios and raise stamp duties" are characterized as "a proactive and well calibrated response."
- Vigilance: It will be "essential to remain vigilant and introduce further measures, should circumstances so warrant," to avoid a future "protracted and painful" downturn if current exuberance is left unchecked.
Getting the Diagnosis Right: Avoiding a Housing Price Bubble in Hong Kong SAR — Nigel Chalk, December 21, 2010.