After a Hong Kong visit, a delegation of the International Monetary Fund (IMF) has published an annual assessment of Hong Kong, which says Hong Kong's economy is well placed to tackle risks with its strong policy frameworks, robust oversight of the financial system and ample buffers. But the report warns of potential risks. In particular, rising interest rates will accelerate property market adjustment which in turn will affect the real economy. In fact, housing price in recent months has gone up again to approach historic high, with the housing affordability ratio rapidly worsening. This indicates the risk of a property bubble is further intensified, becoming the greatest latent danger for Hong Kong's economy.
Hong Kong's economy grew 1.9 per cent in the first three quarters of this year, but residential housing price soared up nearly 10 per cent, continuing to far outgrow the economy. The gap between citizens' income and housing price further widened. It is necessary for authorities to take measures at the beginning of last month to enhance adjustment and control of the property market by further curbing the property-investment demand. Otherwise, Hong Kong's property market would run out of control to risk an asset bubble burst, which may deal a catastrophic blow to Hong Kong's economy.
The IMF report says that Hong Kong's "Prudent fiscal policy and intensive supervision of the financial system have built buffers that can be drawn on to weather a less favorable environment", but points out three downside risks that must not be taken lightly: a steeper-than-expected U.S. rate cycle, stresses from exposures in Mainland China, and an accelerated housing price adjustment in Hong Kong. This IMF report could be said to hit the nail on the head.
First of all, Hong Kong has already begun to covertly increase interest rates, following the United States. Even there is still some uncertainty about the pace of the interest rate hikes by the U.S. Federal Reserve (Fed), but the U.S. has already virtually increased interest rates for some time given that the yields of long-term bonds have soared up in recent months to increase the financial costs for enterprises and individuals. This also happens in Hong Kong. The one-month Hong Kong Interbank Offered Rate (HIBOR) has been gradually going up, exceeding 0.5 per cent lately. This means HIBOR is bottoming out and tending to go up steadily. So payment for housing mortgage based on HIBOR grows steadily. The risk facing the real estate market is self-evident.
Secondly, Hong Kong is closely bound up with the Mainland economically. This admittedly brings golden opportunities for Hong Kong's economic and financial development, but related risks should not be overlooked. The decrease in the number of Mainland visitors has produced an immediate effect on Hong Kong's tourism and retails. Last year, the Ocean Park suffered a loss, the first since 2003 during the outbreak of the Severe Acute Respiratory Syndrome (SARS) epidemic, due to a sharp decrease of visitors. The property markets in the Mainland and Hong Kong are also quite closely linked. Under policy adjustment and control, the property market in the Mainland begins to cool down. Hong Kong can hardly be spared.
Thirdly, global financial market remains volatile endlessly. Prices of stocks, foreign currencies, bonds and commodities keep going down, and a price adjustment in real estate and assets is near. The IMF forecasts Hong Kong's economic growth will accelerate next year to 1.9 per cent from this year's 1.5 per cent. This in fact still maintains a low-speed growth, which has something to do with the fact that there are too many political and economic variables outside Hong Kong, and Black Swans are likely to show up at any moment. For instance, Italian government's proposal for revising the constitution was vetoed in a referendum. While the reaction of global financial market seems calm but in fact undercurrents are surging. Due to the unstable political situation, Italy's third largest bank may fail to carry out its financing plan and eventually has to seek a government bailout. A crisis in Italy's banking industry may break out at any moment to bring disaster to the whole world. The adjustment of Hong Kong's property market, with stretched valuations, could be steep or shallow.
It has become an urgent priority for the SAR Government to curb asset bubble to prevent a hard-landing in property market that will damage the real economy. In addition to introduce adjustment and control measures targeting at property investment demand, it is also very important for the Monetary Authority to stick to the countercyclical measure of tightening the maximum loan-to-value ratio for housing mortgage loans. 08 December 2016