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Hong Kong fears new property bubble

Friday, September 14 08:23:44

The latest stimulus from the U.S. Federal Reserve increases the risk that Hong Kong's red-hot property market will overheat and authorities may act to deal with that at an "appropriate" time, Hong Kong's de facto central bank said today. The Federal Reserve kicked off another aggressive stimulus programme on Thursday, known as QE3, saying it would pump $40 billion into the U.S. economy each month until it saw a sustained upturn in the weak jobs market. Hong Kong, with one of the world's most open economies and a property market that is easy to enter, has low transaction costs and no capital-gains tax. That makes the city's housing market a popular target for "hot money" when liquidity enters the global economy, as expected with QE3.

"Due to the launch of QE3 and as the risks of the euro debt crisis calm down, the chance of an overheating asset market in Hong Kong is escalating, so we will introduce suitable measures at the appropriate time," Norman Chan, chief of the Hong Kong Monetary Authority, told reporters. "The risk of an overheating property market also suggests a potential asset bubble," Chan added.

Shares of Midland Holdings, the largest listed property brokerage in Hong Kong, jumped as much as 11 percent in Friday trading. Since most brokerages are small and privately held, the movements of Midland's shares are a leading indication that investors expect transactions in the secondary market, for homes that are not new, to pick up as the result of cash flooding into Hong Kong. Midland was the top performer in the Hang Seng Construction and Properties Index at 0713GMT, with that index up 3.16 percent. All Hong Kong property stocks gained ground on Friday after the Fed action, with the blue-chip Hang Seng Properties index up 3.3 percent, helping fuel a 2.9 percent gain in the benchmark Hong Kong index, the Hang Seng.

Sun Hung Kai Properties Ltd was leading the blue-chip gains, up 4.5 percent, after the company posted record core earnings on Thursday, despite a high-profile bribery scandal that has ensnared the billionaire brothers who run the company. Chan said he did not expect the U.S. measures will put significant pressure on Hong Kong's low interbank interest rates. Hong Kong's interest rates are linked to those in the United States because the Hong Kong dollar is pegged to its U.S. counterpart. Chan reiterated that the Hong Kong government has no plans to change the Hong Kong dollar's peg to the U.S. currency. The Fed said it was not likely to raise overnight interest rates from their current near-zero level until at least mid-2015. Previously, it had set such guidance at late 2014.

That pledge and the U.S. slowdown come at a time when Hong Kong's economy has the highest property prices in the world, according to real estate consultant Savills. Borrowing costs at near-record lows and a flood of buyers from mainland China have also pushed up Hong Kong real estate prices and fuelled broader inflationary pressures in the territory. Hong Kong home prices are up 12.3 percent in 2012 and have soared 89 percent since the end of 2008, according to data from private Centaline Property Agency. The price-surge has made it hard for lower-income households to buy property.

Hong Kong Financial Secretary John Tsang warned Hong Kong banks that they need to remain alert to economic risks in an address to the Hong Kong Institute of Bankers on Thursday. In July, he warned that the risk of a property bubble will remain as long as interest rates stay low. Housing prices are a key focus of the administration of Hong Kong's new leader, Leung Chun-ying, a former property surveyor who took office on July 1. He has pledged to introduce more public-rental and subsidized housing, including a controversial plan to restrict the sale of some property plots to Hong Kong citizens and permanent residents. ( C) Reuters