Hong Kong may suffer fallout from China’s anti-bubble moves

Stronger yuan will make HK homes more attractive to mainland Chinese

China’s steps to cool record property price gains and allow the yuan to appreciate may stymie Hong Kong’s efforts to contain surging home values in a city with its own currency pegged to the US dollar.

A stronger yuan would make Hong Kong’s homes more affordable to mainland Chinese, who have helped drive a 38 per cent jump in prices since end-2008, and fuel further increases, seven out of nine analysts surveyed by Bloomberg News said. A revaluation may also encourage locals to buy property to hedge against inflation, they said.

China may allow the yuan to appreciate as it tries to avert the bursting of asset bubbles after stimulating an economic recovery last year with record new loans. The government is stepping up measures to rein in the real estate market with curbs on third-home purchases and increased downpayment requirements after a record increase in home prices in March.

‘China can’t care so much about Hong Kong, because it has problems cooling down its own property market,’ said Francis Lui, an economics professor at the Hong Kong University of Science and Technology. ‘Hong Kong can’t control China, it has no monetary policy and the only tool is to increase land supply, but it will take around four years to build.’

China will allow the yuan to appreciate by June 30 to curb inflation, a survey of analysts showed last week. Options prices suggest that Hong Kong’s central bank would maintain its 26-year-old peg to the greenback.

Ruled as a special administrative region of China, Hong Kong is the mainland’s trade and financial hub with its own legal and currency systems. With the peg to the US currency, Hong Kong has kept its base rate at a record low of 0.5 per cent since December 2008, resulting in 20-year-low home loan costs.

Low interest rates, coupled with an inflow of Chinese buying, led Hong Kong’s home values to rise 29 per cent last year, according to Centaline Property Agency Ltd, one of the city’s biggest realtors. Luxury residences climbed 45 per cent, according to London-based property broker Savills Plc.

About 19 per cent of buyers of luxury properties – those that cost at least HK$10 million (S$1.77 million) each or are bigger than 1,000 square feet – last year were from mainland China, Centaline said.

The price jump has sparked a public outcry over housing costs and increased pressure on Hong Kong’s government to raise land supply. Financial Secretary John Tsang said yesterday that the government was ‘highly concerned’ about gains in home prices and would speed up land auctions to make more property available.

The city may also raise the stamp duty on homes sold for less than HK$20 million and warned that low mortgage rates won’t continue forever. The government in February said that the stamp duty on homes selling for more than HK$20 million would be increased to 4.25 per cent from 3.75 per cent as of April 1.

It raised downpayments on luxury homes to 40 per cent from 30 per cent in October, limited coverage on some loans and clamped down on marketing techniques.

The city’s home prices rose the most among the world’s major housing markets last year, London- based property adviser Knight Frank LLP said in January, climbing 33 per cent on average.

The International Monetary Fund and investor Jim Rogers warned of a possible bubble in Hong Kong. Mr Tsang said that the government wants to reduce the risk of a ‘property bubble’ and keep housing affordable when he delivered his Budget speech on Feb 24.

‘Mainland Chinese buying is the most important factor driving up Hong Kong luxury home prices,’ said Louis Chan, managing director of residential properties at Centaline. A stronger yuan would ‘be positive for luxury properties, as they like to buy those that cost between HK$20 million and HK$30 million’, Mr Chan said.

He likened the rich mainlanders to wealthy Hong Kong residents buying properties in London. ‘These people have deep pockets; the Chinese buy Hong Kong homes to invest, and they like the freedom here where turnover is quick and there are no government constraints on property transactions.’

Source : Business Times – 22 Apr 2010
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