## Getting the Diagnosis Right: Avoiding a Housing Price Bubble in Hong Kong SAR

_IMF Blog, December 21, 2010_

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**Canonical URL:** [Getting the Diagnosis Right: Avoiding a Housing Price Bubble in Hong Kong SAR](https://www.imf.org/en/blogs/articles/2010/12/21/avoiding-a-housing-price-bubble-in-hong-kong)

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## Bibliographic details
- Authors: Nigel Chalk
- Published: December 21, 2010

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### 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.*

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## References

- [dismal outlook for real estate markets](http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c1.pdf.)
- [like many countries in the region](http://blogs.imf.org/2010/10/21/sustaining-asia%E2%80%99s-recovery/)
- [“Listen to Ashvin Ahuja talk about 'China: Property Bubble in the Making?'](http://www.imf.org/external/pubs/ft/survey/so/pvcast.aspx)
- [Our view](http://www.imf.org/external/pubs/cat/longres.cfm?sk=24406.0)

_Source: https://www.imf.org/en/blogs/articles/2010/12/21/avoiding-a-housing-price-bubble-in-hong-kong_